Turn Your Corporate Vehicle Into A Tax-Smart Asset

Do you operate your business as an S corporation or a C corporation?

If the answer is yes, does your corporation own the vehicle for business purposes? And do you use the corporate vehicle for personal purposes?

If yes, this article is for you.

Situation

Say you use the corporate-owned vehicle 80 per cent for business and 20 per cent for personal purposes.

Vehicle

To understand what a vehicle is for tax purposes, you have to dig into the IRS regulations, where the IRS defines an “automobile” as any four-wheeled vehicle manufactured primarily for use on public streets, roads and highways.

The following vehicles fall in this category: cars, sport-utility vehicles (SUVs), crossover vehicles, minivans, cargo vans light, general-purpose trucks with unloaded weight ratings of less than 13,000 pounds.

Thus, to value your personal use of the corporate-owned vehicle, you treat the car, SUV, and pickup truck under the same valuation rules.

Questions

Since it is your corporation and you have personal use of the corporate car, you need answers to the following three questions:

Does the value of your personal use become taxable income to you?
How does your corporation compute the corporate deduction for the vehicle?
How does your corporation compute the value of the income to you?

Value of personal use

The value of your personal use may become taxable income to you, or it may not.

Taxable: If your S corporation treats the value of your personal use as W-2 compensation to you, then the value of your personal use is taxable income to you.

Not taxable: If you reimburse the corporation for the value of your personal use, then you have no taxable income.

As you can see, the law does not give you (the owner of the corporation) a free personal-use ride in the corporate-owned car. You either

Pay for the ride with taxable income, or
Reimburse the corporation for the ride.

Reimbursement is the best option; here’s why.

Corporate deduction

If your corporation treats the value of your personal use as W-2 compensation, or if you reimburse the corporation for your personal use, then the corporation has a 100 percent business-use vehicle to deduct.

More precisely, this is what must happen- that is, your corporation must treat the corporate vehicle as a 100 percent corporate vehicle.

That’s how you, the employee, get your employee treatment.

More than 50 percent businesses use rule

Because you are a “more than 50 percent” owner of the corporation, your personal use of the corporate car is not a qualified business use for the corporation.

This “non-qualified use” does not affect the W-2 or the amount you would reimburse to the corporation for your personal use. However, for the corporation, it can trigger the Section 280F straight-line depreciation rule, which would eliminate the corporation’s Section 179 expense deduction for the vehicle.

Example: Sam Allen owns 100 percent of his corporation, works as an employee in the corporation, and drives a corporate-owned $65,000 pickup truck with a 6,750-pound gross vehicle weight rating (GVWR). He uses the pickup 43 percent for business purposes and 57 percent for personal purposes. Because the pickup truck fails the “more than 50 percent” test, the corporation may not

Elect any Section 179 deduction on the pickup.
Elect bonus depreciation on the pickup, or
Use MACRS to depreciate the pickup

Because the vehicle fails the “more than 50 percent” business-use test, the Sam Allen corporation must use the straight-line method to depreciate the pickup.

Thank goodness you are not Sam Allen! Your business use is 80 percent; therefore, your corporation may elect Section 179 and use bonus depreciation.

Computing the value to you

Your corporation does not calculate the value of your 20 percent personal use based on the cost of the corporation.

Because the truck costs $65,000, and because you both own and work in the corporation, tax law gives your corporation only two methods for valuing your personal use of the corporate-owned vehicle:

The general valuation rule: This is the amount you would have to pay in an arm’s length transaction to lease the same or comparable vehicle under the same or comparable conditions (eg two years) in the geographic area where the vehicle is available for use.
The lease valuation rule: This is an IRS-created, safe harbor lease value using the IRS lease value table calculations.

Example: You drive the $65,000 corporate vehicle 20,000 miles; 20 percent of this distance, or 4,000 miles, counts as personal miles. Using the IRS lease valuation tables, the value of your personal use is $3,687, computed as follows:

$3,350 for the value of the vehicle ($16,750 per IRS lease value table calculation, at 20 percent), plus
$337 for the actual cost of gas.

The lease valuation tables include the value of insurance and maintenance but require an addition of either (a) 5.5 cents per mile for fuel, if provided in-kind or (b) actual costs, if reimbursed by the corporation or charged to the corporation (e.g. via a corporate credit card).

In-kind is unlikely: For the corporation to provide fuel in-kind, it would have to supply the fuel directly to your corporate vehicle. This is highly unlikely, as it would require a fuel source (say, a 100-gallon drum) at the corporate facility,

5.5 cents is unrealistic: With today’s gas price, 5.5 cents works out to $1.10 a gallon if your vehicle gets 20 miles to the gallon, or $1.65 at 30 miles a gallon.

For the employee of an S or C corporation with less than 20 vehicles, the corporation must use the actual fuel cost in valuing fuel under the annual lease value method.

W-2 or not?

Should your corporation put the value of your vehicle for personal use on your W-2? Or should you reimburse your corporation for your personal use?

You likely save taxes when you reimburse the corporation of your personal use. The reimbursement avoids payroll taxes, and the money you use for that reimbursement may come from funds that were taxed at lower rates or not taxed at all.

The corporation deducts 100 percent of the vehicle regardless of whether it puts the value on your W-2 or accepts a check from you that reimburses the corporation for your personal use.

On the corporation’s books and on its tax return, you would have a separate line item for the W-2 inclusion or reimbursement. You do this because you value your personal use of the corporate vehicle differently from how you compute the corporate deduction.

Loan

Often, the value of your personal use is not known until after the end of the year. What do you do then?

First, you should avoid this if possible by getting the value at the year-end. Getting it after year-end is trouble: it can create constructive dividends for the C corporation – these are not deductible. And it can create the need for an S corporation to amend W-2s if reimbursement is not in the cards.

One treatment is to have the corporation set up a loan at year-end for the amount of your reimbursement. To ensure that this works, you must ensure that the loan is properly documented and repaid.

BergerCPAFirst, with over 30+ years of experience, offers comprehensive tax preparation services for individuals and businesses nationwide. Our commitment is to provide personalized attention while ensuring compliance and maximizing tax benefits. If you have any questions or would like to schedule a consultation, please call (201) 587-9200 or send us an inquiry.