Deciding whether or not to have your LLC or S-Corp own a vehicle is a common question. There are several ways to handle automobile deductions and we’ll first look at the option of the business owning the vehicle.
Company Owned Vehicle
If the company truly owns the vehicle, then it must be titled to the company. Generally having your name AND the company’s name is OK. This might be a challenge with car loans and leases, but for the company to claim it as an asset and subsequent expenses the title needs to be in the LLC or S-Corp’s name. And if you buy the car yourself and then transfer it to the business, you may need to pay sales tax to make the transfer. The CA DMV charges sales tax for transfer of title. At nearly 10% sales tax rates today transfer to the company can be an expensive proposition.
One would also need to be prepared for higher insurance rates. Most auto policies will charge a higher premium for cars owned by a business for business purposes.
A company owned vehicle may be eligible for a Section 179 deduction. This is an accelerated depreciation deduction which allows business property to be more quickly depreciated. IRS Revenue Procedure 2013-21 states that passenger automobiles can take $11,160 in depreciation the first year, $5,100 the second year, $3,050 the third year and $1,875 each year thereafter until fully depreciated. Of the first year depreciation, $8,000 of it is bonus depreciation and the purchase must qualify for bonus depreciation (a new vehicle, not just new to you, for example). There are some further depreciation advantages to consider as well. The Section 179 deduction is higher for trucks and vans. Note these numbers are for the 2013 tax year. The depreciation numbers and revenue procedures are released in April for the current tax year. So, 2014 figures should be released in April 2014.
To take Section 179 depreciation the vehicle must have a greater than 50% business use. This is one of the major obstacles for shareholders especially if they do not have another car. Another issue with depreciation is the recapture of depreciation- any gain on the sale of your vehicle (the difference between the original price less depreciation and the sale price) is taxable. The good thing is that most cars depreciate rapidly as they relate to fair market value or resale value.
Work trucks and vans might not depreciate as quickly, so there might be some depreciation recapture on your gain if you sell the vehicle. Before selling a high value work vehicle, trailer, tractor, etc it is advisable to contact your CPA or tax advisor to see what the tax implications may be.
If your business leases the vehicle, the business portion of the lease amount is expensed. However, there are limits to how much can be expensed, especially for expensive or what the IRS would consider luxury vehicles. The disallowed lease payment is then added back into income and taxed, leaving only the IRS allowed portion as a deductible lease expense. So before you lease a new Ferrari call Jarus & Co CPA in Orange County California. We’ll help you determine the best way to structure ownership (personal or business) as well as the most advantageous method of depreciation if you or your company owns the vehicle.
Another consideration- if you are driving a vehicle owned by your business and get into an accident, the company may be exposed to liability. Even if the car was used for personal reasons there may be exposure to your LLC or S Corp and your attorney can probably tell you more about this.
A final and very important point is that any personal use must be considered taxable income if you own more than 2% of the LLC or S-Corp. Personal use is typically determined by taking the personal miles and multiplying them by the Federal mileage rate. And depending on how many miles you drive personally, you might have to claim this on quarterly (versus just Q4) payroll tax filings along with possible estimated tax payments.
And here’s where you need to watch out on personal use – if the operating cost of your vehicle is less than the standard mileage rate (more often than not it is), you will be inflating your income. If you decide to use actual expenses, then you will be reducing your business deduction. It works both ways.
Generally it is a lot of work to have your LLC or S Corp own your vehicle. More often than not is is not worth the additional time and cost but every situation is unique.
You Own The Vehicle, Get Reimbursed
This is most often the best method in terms of maximizing deduction and reducing work, especially if Section 179 depreciation is not going to benefit you much. You would own the vehicle yourself and turn in expense reports in the form of mileage logs. The company would then reimburse you accordingly. This can be a great option for a lot of reasons.
First, you are reducing the net income of your company, and if you are an S-Corp the lower income could decrease the amount of reasonable salary you must take as a shareholder. Keep in mind if your LLC or S Corps is a cash basis taxpayer you will need to make these reimbursement payments to yourself in the year in which you plan to have the tax deduction. Do not wait until after the year has ended to reimburse yourself for the past year because you will push the deduction into the next filing period! Please contact Jarus & Co for a consultation regarding your mileage reimbursement plan and we’ll ensure you process transactions in a fashion which allows for timely tax deductions.
Second, most cars operate significantly less than the Federal mileage rate. If you have a car that get 30 miles per gallon and costs about $2,500 per year in maintenance and depreciation (inexpensive car), your annual costs at 12,000 business miles per year is probably going to be $1,600 in gas plus $2,500 for a total of $4,100. But your reimbursement will be 56.5 cents x 12,000 miles or $6,780 (56.5 cents is the 2013 rate, it changes annually). So in this scenario you just took home $2,680 tax-free in a perfectly legal transaction. We have extreme high mileage drivers such as real estate appraisers who benefit greatly from this structure.
Third, this is also much better than taking the simple mileage deduction on your personal tax return (1040). Any mileage deduction is completed within Form 2106 on Schedule A. So, first you must be able to itemize your deductions and exceed the standard deduction. Next, any Form 2106 expenses (such as home office, mileage, cell phone, internet, meals, etc.) must exceed 2% of your income, and only that portion that exceeds 2% is deducted. So, if you make a $120,000 as a household, the first $2,400 in mileage is not deducted. If you get reimbursed from your LLC or S-Corp, all the mileage expense is deducted at the corporate level. This directly improves your tax consequence as a shareholder.
Your company must have an Accountable Plan to take advantage of the You Own The Vehicle, Get Reimbursed scenario.
You Own The Vehicle, Take Mileage Deduction
This might be the easiest option, but it is not usually the most tax efficient. First, if your LLC is an S-Corp then your reasonable wage figure could unnecessarily be higher if you are not reimbursing yourself through an Accountable Plan, and therefore you are paying more Social Security and Medicare taxes which is a huge negative.
Second, as mentioned earlier, you have to exceed the 2% threshold for deducting business mileage. To reiterate, any Form 2106 expenses (such as mileage, cell phone, etc.) must exceed 2% of your income, and only that portion that exceeds 2% is deducted. So, if you make a $120,000 as a household, the first $2,400 in mileage is not deducted. Another huge negative.
Finally, you still need to record written mileage logs detailing odometer readings, date, business purpose or connection, etc. Why not just turn those in and get reimbursed from your company?
If you have any questions about vehicle deductions for your business Jarus & Co CPA in Orange County would love to help. We offer free one hour consultations for new tax clients and would love to talk with you about your tax needs regarding vehicles and beyond. Please fee free to complete our contact questionnaire to request a consultation.