Discussion:Automobile personal use
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Discussion Forum Index --> Tax Questions --> Automobile personal use
| 4 December 2006 | |
| I know we've gone over this issue many times, but can you all check out my logic once more?
Taxpayer has corporation buy a $60,000 auto (for cash - not borrowed funds) which will be used 100% personally (without checking with accountant first). The car is a passenger auto, under 6,000lb. Corporation deducts depreciation - roughly $3,000 year 1; $5,200 year 2; $3,200 year 3; and $1,900 per year for the many many years until fully depreciated, plus annual expenditures for gas, insurance & maintenance. W-2 for owner must include the annual lease value of about $15,000 per year plus 5.5 cents per mile for gas. This inclusion amount doesn't go down for 4 years, at which time it is based on the market value. If the auto has kept 1/2 of its value, the annual lease inclusion will then continue, at a rate of around $8,000 per year, plus gas. Am I crazy, or is this not a real loser in terms of income taxes? Thanks to all. | |
| December 4, 2006 | |
| There wouldn't be inclusion if it's indeed used 100% for business. | |
| December 4, 2006 | |
| Oops. Well, then duh, why are you doing this? It's a loser because you're working for nothing, or charging the client to do nothing. It's a personal car. Leave it alone. | |
| 4 December 2006 | |
| Kluskey: I don't agree with your conclusion that the arrangement is "a real loser in terms of income taxes." The employee's out-of-pocket cost is the taxable fringe benefit times their tax bracket which generally will be less than the out-of-pocket cost if the employee owned the car. | |
| December 4, 2006 | |
| So LHHess, you're suggesting that this guy take a 100% personal vehicle and run it thru the company? | |
Death&Taxes (talk|edits) said: | 4 December 2006 |
| Much of this depends on whether the employee is the 100% owner of the corporation. If so, employee is saving FICA and Medicare costs on the extra salary he would have to take to buy and pay the expenses of the car. If part owner then his fellow shareholders are paying for part of it, and if a non-shareholder, then Larry's analysis is right on, he it getting the car for the tax cost. | |
| 4 December 2006 | |
| JR: No, I'm not suggesting that anyone just "take a 100% personal vehicle and run it thru the company." The company must be the owner of the vehicle. That was one of the facts of Kluskey's scenario. Anyway, the taxable fringe benefit rules wouldn't apply to a vehicle not owned by the company. | |
| 5 December 2006 | |
| The company is an S corporation, 100% owned by the client. Also, he has already exceeded the FICA limit.
Here's my thinking - I was looking at the 1st 10 years - the car expenses will be about $90,000 ($60,000 purchase price plus $30,000 operating expenses). I'm finding in the regs that I have to put the annual lease value on each year's W-2. The annual lease values turn out to be about $132,000 for the first 10 years. Furthermore, what with the miniscule depreciation allowed for the luxury auto, the company's deductions over 10 years will be only will deduct only about $55,000 ($25,000 depreciaton plus $30,000 operating expenses. The problem seems to be the disconnect between the amounts required to be picked up on the form 1040 as calculated under the annual lease value rules, vs the actual costs of the auto. | |
| 5 December 2006 | |
| Can the corporation deduct anything in relation to this vehicle? The corp is the owner, but there is no business use of the car. The difference between what the corporation pays for the vehicle and any amounts deductible on the 1120S would be a Schedule M-1 adjustment. On a side note, this arrangement would muddy the waters as far as limited liability goes in the event of an accident. | |
| 5 December 2006 | |
| Please forgive the confusion in my previous emails. I thought that when I was interrupted and "saved", I would be able to go back and proofread and complete my posting. I'll learn eventually (I used to have quite a high IQ - I don't know what's happened to it)!
The corporation/employer will be able to deduct about $55,000 in auto expenses over the 10 year time frame I'm looking at. As per Reg 1.161-21, I appear to have to calculate the W-2 inclusion related to the employer provided the auto fringe benefit as the fair market value of the use of the auto. It looks like that fair market value, according to the annual lease value tables, is not based on the amount of the employer's deductions, and is, in fact much more that those deductions. I come up with about $132,000 of income includable in the owner/employee's W-2's over the first 10 years. This disconnect is what makes me think the situation is a loser in terms of taxes. Any thoughts? | |
| 11 December 2006 | |
| It is my understanding that a shareholder owning more than 2% of the S-Corp is not considered an 'employee' for fringe benefit purposes. Therefore, the ALV would simply reduce the corporation deductions, and automatically provide the additional income passed on to the 100% owner via the K-1.
Let me know if I'm right or wrong on this. | |
| 11 December 2006 | |
| BrentG: I think the answer is that the taxable value of the personal use of a company-owned vehicle is a taxable fringe benefit to a 2-percent shareholder in an S corp. that must be treated as wages or other compensation subject to the usual withholding of income & FICA taxes.
I base my conclusion on Code Sec 1372(a)(2) says the partnership rules apply for fringe benefit purposes to a 2-percent shareholder in an S corp. For the purposes of this rule, fringe benefits include health insurance, group term life insurance & meals & lodging furnished for the convenience of the employer. Hopefully, someone else can come up with a cite that supports your conclusion. --Larry Hess, CPA - Albuquerque, NM | |
| 7 March 2007 | |
| If the employer lets and employee use the company auto for % of the time, How does the employer handle it on the company tax return. I know that the personal use is put on the employees W2 but does the employer deduct the % business use as auto expense and the % personal use as wages and then pay and duduct the payroll taxes?
Neil | |
