Discussion:Auto expense in S Corp

Or should that (purchase auto through company) be a consideration? Any advice would be appreciated.

Thoughts/suggestions?

I noted in this chat that Ahe72 & JR1 discuss home office expense deductions for 1120S filers. I was under the understanding that a S Corp home office was not handled the same way as a Sch C filer since their is no home office form and the home in most cases if not all cases is not owned by the corporation but by the individual. Rather the S Corporation should pay a FMV rent to the home owner/shareholder. This rent is reported on 1120S as rent expense. The homeowner/shareholder would then report this rent income on 1040 Sch E. The allocated business useage for the home office expenses & depreciation would go on Sch E as well. Another words this home office basically becomes a rental property for the business allocated percentage. Warning: be sure that a lease agreement is drawn up between the leasee and leasor. Susan

"S Rept No. 99-313 (PL 99-514) p. 84 . Where such a lease arrangement exists, the only deductions that are allowable are those that would be allowable in the absence of any business use, e.g., mortgage interest, real estate taxes and casualty losses. 16 However, under these circumstances, only otherwise deductible personal” casualty losses are deductible. The rule discussed above bars any deduction for business casualty losses, as well as trade or business expenses and depreciation, with respect to any portion of a taxpayer's dwelling unit rented by the taxpayer to his employer, and used by the taxpayer to perform services as an employee for the employer."

I know some S owners use accountable plans to reimburse for their use of home, but I have always wondered how someone would prove that 16.6% of their utilities were used for business.

Obviously if it's a situation where a work truck (or perhaps a tool truck that would not have to report commuting miles) I would recommend something different.

Just my two cents.

This all make so much sense to me! I fail to understand why business owners want to complicate things. So there it is, the vehicle, in order to be listed as business property, I feel should be titled to the business. Therefore, as you say, if it is titled to the business, technically a commercial auto policy should be in place.

We determined that if the vehicle is in the S corp name, then the corp must take actual expenses and not mileage rate. If the auto is in the shareholder name, then he will take the mileage rate. What if the S corp has 4 employees? Can the shareholder buy 4 autos in his personal name and have the S corp take the deduction for all the mileage? If he put the autos in the corp name and took depreciation, that deduction would be so small since each auto will go 30,000 miles a year for business. Mileage rate would be 3-4 times the actual expenses. The autos would stay at the business office and be 100% business.

S-Corp.<p> 1 employee/owner.<p> Business purchases car in business name.<p> Vehicle is being depreciated at business use percent 75%.<p> Car is used for commuting and other business related activities only.<p>

Question:<p> 1. Does the business have to exclude 25% of both depreciation AND any other auto-related expenses (maint., gas, etc.), or just the depreciation?<p> 2. Is the answer to # 1 connected in any way to how much the employee has reported on his w-2 as fringe benefit, or is an entirely unrelated, separate issue?

Thanks

Then, it includes on the employee/owner's W-2 the value of the personal use of the auto, which can be calculated according to the regs that outline the Annual Lease Value calculations.

So, yes, the two are in a way disconnected.

Also note that IRC Sec. 280F(b) imposes a limit on the annual amount of deprecation that can be claimed on listed property, such as a passenger auto, that is not predominantly used (more than 50%) in a qualified business use.

Qualified business use determines whether the property can be depreciated using MACRS rather than ADS/straight-line and whether the Section 179 deduction is available for the property. Furthermore, the corporation must recapture a portion of the accumulated depreciation if qualified business use falls below 50% [Temp. Reg. 1.280F-3T(d)(1)]. Under IRC Sec. 280F(d)(6)(C), qualified business use for purposes of the listed property rules includes any use in the trade or business of the corporation except:

1. the leasing of any property to a 5% owner or related person [as defined in IRC Sec. 267(b)], or

2. the use of property as compensation for the performance of services by any person (other than a 5% owner or related person) unless an amount has been included in the employee’s income and there has been withholding on the amount.

Smokey, regarding your statement that the corp can take 100% of the depreciation... it seems like you are saying that the individual has to pick up the personal use percentage but the business can deduct 100% as business use. How can it be both 100% business use on the corp, but also considered personal for purposes of w-2 reporting? Is it that the the term "business use" has different meanings under two different definitions? Thanks!

The corporation is deducting the entire cost of the vehicle. Since part of its use is personal, the employee has some taxable income. The employee must pick up as income the market value of the personal use. IRS regs explain how to calculate the value of that personal use.

For example, the IRS Annual Lease Value tables show $5,600 as the annual value of a car worth $20,000. The $5,600 is an approximation of what it would cost to enter into a four year lease for a car. This value is used for four years, and then a new value is calculated based on the new market value of the car.

So, the figure that is included as income on the form W-2 is not related to the corporation's depreciation deduction. The same is true for whatever the corporation pays for repairs, interest, and insurance. The amount included on the employee's W-2 is not deducted anywhere on the corporation tax return.

Does this explain it?

Regarding the personal use percentage times the Annual Lease Value to be reported on w-2... do you agree that personal use would include commuting miles? Assuming a perfect triangle here: 10 miles to office, 10 miles to a client, and then 10 back home, 2/3 of this is personal?

Check out Revenue Ruling 99-7 and CCA 200018052.

However, I have read posts and articles that those requirements only relate to Schedule C & E (from Smokeytax) or that it is still allowed if the owner pays the corporation back or has it reported as income then it is still deductible. The problem is that there is no authoritative backup given for these interpretations of the code. Does anyone have a concrete source to make such claims? Also Warren, the written policy for commuting only does not apply to a 1% or greater owner so it cannot be used [1.61-21(f)(v)].

The 1.280F-6 code reads that it is not qualified business use if the "use of property provided as compensation for the performance of services by a 5-percent owner." So what if the primary reason is not for compensation, but convenience and security? If the employee/owner reimburses the corp for the value of personal use rather than goes on the W-2 is the vehicle now 100% qualified business use because the personal use is not "provided as compensation for performance of services?" Argh, this stupid thing is frustrating me!!!

Thanks for your input.

End of story, the rest of the conditions don't matter.

Here's the relevant reg section in full. Read it with a "or" (note that #3 is the confusing issue)

(ii) CONDITIONS ON THE USE OF SPECIAL VALUATION RULES FOR
         BENEFITS PROVIDED AFTER DECEMBER 31, 1992. Neither the employer
         nor the employee may use a special valuation rule to value a
         benefit provided after December 31, 1992, unless *** one *** of the
         following conditions is satisfied--

              (A) The employer treats the value of the benefit as wages
              for reporting purposes within the time for filing the
              returns for the taxable year (including extensions) in
              which the benefit is provided;

              (B) The employee includes the value of the benefit in
              income within the time for filing the returns for the
              taxable year (including extensions) in which the benefit is
              provided;

              (C) The employee is not a control employee as defined in
              paragraphs (f)(5) and (f)(6) of this section; or

              (D) The employer demonstrates a good faith effort to treat
              the benefit correctly for reporting purposes.

(ii) Exception for certain user by 5-percent owners and related persons-(A) in general. The term qualified business use shall not include: (1) Leasing property to any 5-percent owner or related person. (2) Use of property provided as compensation for the performance of services by a 5-percent owner or related person, or (3) Use of property provided as compensation for the performance of services by any person not described in paragraph (d)(2)(ii)(A)(2) of this section unless an amount is properly reported by the taxpayer as income to such person and, where required, there was withholding under chapter 24.

So my question is, even if the premise behind letting a 5-percent owner use a corporate vehicle for personal commuting or other use is not related to compensation (i.e. so the vehicle doesn't have to be left parked at the business location) when the value is added into that owner employee's compensation on form W-2 is it a de facto "compensation for services" that disqualifies that use for the computation of depreciation and other expenses?

I use annual lease value and 5.5 cents per mile for my clients. Send form to clients to complete in December each year. This auto fringe benefit is reflected on the W-2 (I do not record it on the corporation's records except for social security/medicare tax as expense and due from employee). Publication 15-B

I always thought that depreciation would be prorated based on business use and not at 100% as done by jdugancpa above. Does anyone know where to find substantiation for taking 100% depreciation when using annual lease value? Thanks.

Fuel is not included so separate calculation as fringe.

No mention regarding depreciation for employer?

Merry Christmas

It helps me to understand this issue by looking at the rules for valuing flights taken by employees on employer owned airplanes. Naturally the employer writes off all of the airplane expenses, including depreciation. The IRS allows the market value included on the employees' W-2's to be calculated based on industry standards. I can't imagine being able to figure out the value of the fringe benefit to be included in the employees' income by prorating actual airplane expenses incurred by the employer.

The value of the fringe benefit added to the employees' wages is not recorded as a deduction anywhere on the employer's books. Or, if the employer wants the deduction for wages on his tax return to equal the amounts reported on the payroll returns, he can adjust the net income on the tax returns via schedule M.