Blog Single

Do you operate your business as an S or C corporation? Do you use a vehicle for corporate business that is titled in your personal name? If so, it’s crucial to know how to avoid losing some or all of your business-use vehicle deductions.

Claiming business-use deductions incorrectly can result in losing all of your vehicle deductions to the alternative minimum tax (AMT). Even if you’re not subject to the AMT, claiming business use of the vehicle on your personal tax return can still cause you to lose at least some, if not all, of your deductions.

However, by deducting that personal vehicle correctly, you can maximize the tax benefits of all your business deductions, including Section 179 expensing and bonus depreciation when applicable.

This article explains how to claim tax deductions on a personal vehicle used for corporate business and how to handle vehicle deductions on both corporate and personal tax returns.

What’s at Stake

Example of Section 179 Expensing

Suppose you bought a used $25,000 SUV with a gross vehicle weight rating (GVWR) of 6,550 pounds, used entirely for business.

Under the actual expense vehicle-deduction method, tax law offers two choices for deducting the $25,000 cost:

1. Depreciation over time: The standard depreciation schedule for an SUV with a GVWR over 6,000 pounds spreads the $25,000 deduction over six years.
2. Immediate expensing: Using Section 179, you can deduct the entire $25,000 in the year you purchase and start using the SUV for your business.

(Note: Section 179 expensing and depreciation are not available when using IRS mileage rates.)

Section 179 accelerates the normal depreciation process, allowing you to deduct the full $25,000 upfront, plus deduct the costs of gas, repairs, and other operating expenses.

Example of Combined Section 179 Expensing and Bonus Depreciation

Let’s say you bought a new $50,000 SUV used 100 percent for business. You can take:

• $25,000 in Section 179 deductions,
• $12,500 in bonus depreciation deductions, and
• $2,500 in MACRS (regular depreciation) deductions.

This results in a total first-year deduction of $40,000, all of which is reimbursable through the corporation.

Title to You, Expense to the Corporation

You may have a vehicle titled in your name due to starting a new corporation or other reasons like legal issues, financing terms, or insurance rates. But can you still use Section 179 to deduct the asset’s cost? Yes, if done correctly.

Wrong Way

If the vehicle is titled in your name and used for corporate business, deducting the business use via IRS Form 2106 for unreimbursed employee expenses as miscellaneous itemized deductions can lead to:

1. No deduction due to AMT disallowing all miscellaneous itemized deductions.
2. No deduction if you don’t itemize deductions.
3. Reduced deduction because 2% of miscellaneous itemized deductions are lost to the adjusted gross income floor.

Doing it the wrong way means you will lose some or all of the vehicle deductions.

Right Way

To fully deduct the vehicle, have the corporation reimburse you for the vehicle expenses, regardless of the deduction method (mileage rates or actual expenses). This way, all business expenses and deductions move to the corporate return, and you receive non-taxable reimbursed employee expenses, while the corporation gets the deductions.

For an S corporation, these expenses and deductions pass through to you as the sole shareholder.

Reimbursements from the Corporation

A corporation can reimburse an employee for all expenses allowable under Sections 161 to 199 of the tax code, including Section 179 expensing and bonus depreciation.

Proper reimbursement means:

1. No taxable income for the employee.
2. The corporation gets the full deduction allowed for the expenses.
3. For an S corporation, expenses reduce corporate income, which passes to you as the sole shareholder.

Document Your Reimbursement

Ensure proper documentation to move the expense to the corporation:

• Have an accountable plan in place.
• Submit an enhanced expense report for the actual expense reimbursement of your personal use vehicle.

Your expense report should include:

• A receipt showing your ownership and the vehicle’s cost.
• A statement recognizing that Section 179 expensing and/or depreciation reduce the vehicle’s basis.
• Acknowledgment that Section 179 limits on your personal tax return are reduced by the amount reimbursed.
• Recognition that if business use drops to 50% or less, you’ll reimburse the corporation for the required recapture of deductions.
• A mileage log proving your business use percentage.

A Note on the Mechanics

The Section 179 deduction doesn’t separately show on either the corporate or personal tax return; it’s a reimbursement of an employee expense. Label reimbursed vehicle expenses on the corporate return as either “vehicle expenses” or “employee reimbursed expenses.”

Takeaways

You can buy the business vehicle in your personal name and have the corporation reimburse you as if it had purchased the vehicle. Ensure the corporate reimbursement of:

• Operating expenses, following accountable plan requirements.
• Section 179 expensing, bonus depreciation, and MACRS depreciation through an enhanced expense report.

When reimbursing for Section 179 expensing and/or depreciation, consider using a sample enhanced expense report to:

• Certify business use.
• Recognize Section 179 limits.
• Decrease the vehicle’s basis by the Section 179 deduction.
• Maintain business use over 50% or reimburse the corporation for any required recapture of deductions.