Low business use of vehicle

Hello,

Have a client interested in purchasing a vehicle within an S-corp. Very little business use, say 10% for the year. Want to be sure I have my facts straight on this:

1. Under qualified business use, we are below 50% so no accelerated depreciation. We will use straight-line.
2. Under business/investment use test, we get to count the personal use since it is on the W-2 of owner/employee. Because of this, we fully depreciate the basis of the vehicle, just under the straight-line method, given the qualified business use test.
3. Taxpayer will use ALV tables to determine amount to go on W-2 and picking up 90% of the value as compensation.

In addition to confirming my understanding of the above, wanted to confirm two items:

1. The regs seemed clear that insurance and maintenance is included in the ALV but did not see any guidance on interest? Deductible by the corp?
2. Would this also be the same treatment for a partner in a partnership except we report the ALV as a guaranteed payment?

Thanks for any guidance.

The amount of interest is included in the tables used to charge the stockholder for the personal use so there would be no additional charge to the stockholder. The interest would be deductible to the corp.

I can't answer the partnership situation.

Out of curiosity, why not acquire the auto "regularly" outside the business entity and reimburse the business portion of costs through an accountable plan?

When biz use is under 50%, my policy is to just reimburse for biz mileage and be done with it.

Out of curiosity, why not acquire the auto "regularly" outside the business entity and reimburse the business portion of costs through an accountable plan?

That would be the cleanest way but I am struggling with trying to come up with a comparison between the two methods. I think they would be fine doing it this way if I could show tax savings or a simplified method with minimal tax impact. This is outside of my normal scope and started getting confused when I started to research.

If they were to purchase outside of the company, they would want to increase comp of the individuals to help cover the cost of the vehicle. Then I assume the company would just reimburse for the 10% business use.

My confusion starts because my assumption coming in was that we would get minimal depreciation with 10% business use. That does not seem to be the case. Let me see if I can walk through both methods with a $50,000 vehicle:

1. Purchased by company: Company deducts $1,500 in misc costs and $3,000 in gas (15,000 personal miles/1,666 business). Company get's $10,000 depreciation deduction. Employee picks up $15,575 on W-2 ($14,750 ALV * 90% personal use + 15,000 miles * 5.5 cents). So $14,500 deduction by employer and $15,575 picked up by employee. Would need a gross up of $11,110 to cover fed and payroll taxes (estimate). This would get us to cash outlay/deduction by employer of $25,610 ($14,500 + $11,110). Employee would be picking up $26,685 ($15,575 + $11,110).

2. Purchase by individuals: $10,000 loan payments (ignoring interest in both examples), $1,500 misc costs and $3,000 in gas. Employee needs $14,500 in cash to pay for car expenses. Gross up of $10,243 to cover taxes (estimate). Company then pays out of pocket for mileage, in our case the other 10% would be 1,666 * 62.5 cent standard mileage rate is $1,041. Total out of pocket of $25,784 ($14,500 + $10,243 + $1,041). Employee picking up $24,743.

Methods look very similar, if I have my facts right above, with #2 as you mentioned being much easier. Plan would be once cars are paid off in 5 years they would be sold/traded in. Need to spreadsheet this out but wanted to be sure I had my facts straight first. Anyone that can poke holes in this that would be great, I am sure I'm missing something. Would propose option #2 for simplicity and believe we'd come out ahead after disposition.

It's my understanding commercial auto insurance is going to be required if the business entity owns the auto. It's also my understanding that commercial auto insurance is more expensive than personal auto insurance, on average.

Why do the owners want to do this? Are they under the impression that the tax savings will be greater going this route? Sometimes clients have impressions that aren't always correct and need to be steered toward a better path. Sometimes they hear how great something is from a friend or business associate and think they should do it as well.

You indicated that the tax benefit might be materially the same. If that is correct, I would think we'd want do the "easiest" of the two choices as "easiest" usually translates to lower professional fees. Less time commitment from us, lower fees.

For 10% business use and 90% personal use, I'd advise acquiring personally and reimbursing mileage, not actual expenses. Anything else is really too much work for too little benefit, as JR1 implied. They're free to increase comp if they'd like additional cash to cover the cost and don't want to do that prorata based on ownership.

OP refers to owner/employee and "they". If multiple unrelated users there might be a liability factor to consider.
Generally, I agree that given the business usage an accountable plan is best.

If the vehicle is purchased in the name of the business and is treated as a taxable employee benefit, why isn't it 100% business use eligible for accelerated depreciation? If owned personally and used less than 50%, the limitations would be in play.

Bradford Tax Institute has an analysis/article about company vehicle https://bradfordtaxinstitute.com/Conten ... Title.aspx

I generally advise mileage reimbursement unless vehicle is truly business use and/or driven by employees

It's generally not too difficult to show the tax benefit of the different methods.

Just take the depreciation and compare it (roughly) with the reimbursement rate minus avg cost per mile in gas.

General rule is probably - the fancier the car, the more likely actuals are going to yield a larger deduction.

If this gets you to the standard rate is better, then no need to continue. If it's close then you also need to consider what happens after the vehicle is fully depreciated. That's when it can get complicated since the client would have to know their plans for the future.

Another consideration...if they're making a PTET election to work around the SALT cap because they're capped on the 1040 or close to being capped, it'd be unwise to shift income from the S Corp to the individuals.

Also, acquiring through the S Corp might be inequitable if they're not buying similarly priced vehicles and all selling in the same year. For example, one shareholder is more frugal than the other. He wants to buy a Honda or Toyota and drive it for 15 years. The other shareholder wants to buy a Range Rover and trade it in for a new model after three years. The first shareholder may not appreciate sharing in the gain of a luxury auto every three years... If disparities like that exist or are likely to exist I always recommend an accountable plan that reimburses mileage or actual expenses (with a possible cap on the latter).

One more consideration. Will it be taken out personally at some point? Often happens, and you've got a deemed sale, like recapture depreciation anyway....and if you titled it to the corp, you've got maybe extra fees/taxes depending on the state. Not worth it.

Just piggy-backing on this thread, had an odd question that I can't find an answer to.

Suppose this guy goes ahead and adds the car to the books at 10%, takes 10% of actual, SL depreciation, etc....but in year 2 the biz uses goes to 30%....does the depreciation recalculate for year 2 on that increased biz use %?

I wonder because I don't see depreciation adjusting normally as we change the use %....usually I'm up in the 70-90% range. It seems to lock in the depreciation based on the first year use....

If the vehicle is purchased in the name of the business and is treated as a taxable employee benefit, why isn't it 100% business use eligible for accelerated depreciation? If owned personally and used less than 50%, the limitations would be in play.

The rule is in 280F(b). ADS is required if qualified business use is less than 50%. 280F(d)(6)(B) & (C) says that qualified business use is any use in the trade/business except for certain use by 5% owners and related persons. So...the use of property provided as compensation to a 5% or greater owner is not qualified business use.


As to whether there is a benefit to ownership in the corp vs by the individual, I have gone through this a couple of times and have found each time that if the S corporation is 100% owned by the employee, any difference is minimal. I'm interested in what your calculations show.

First wanted to say thanks for the helpful replies in this thread.

Just piggy-backing on this thread, had an odd question that I can't find an answer to.

Suppose this guy goes ahead and adds the car to the books at 10%, takes 10% of actual, SL depreciation, etc....but in year 2 the biz uses goes to 30%....does the depreciation recalculate for year 2 on that increased biz use %?

I wonder because I don't see depreciation adjusting normally as we change the use %....usually I'm up in the 70-90% range. It seems to lock in the depreciation based on the first year use....

I think this is where I initially got confused. It is understanding now that you get 100% of actual cost under 5 year SL, because the personal use is treated as compensation to shareholder. So while the qualified business use is 10% (for purposes of accelerated depreciation), the business/investment use is 100% in both years under your scenario.

For the curious, I just conducted my own test. I opened an 1120S for 2020, entered some income and a vehicle at 30% use.

Then transferred the file to 21 and upped the biz use. It did bump up the basis and depreciation amounts. I guess I'd not noticed that happening before.

So it's only computing the biz portion, no need to addback for personal use of that.