FMV of Leased Auto to Employee

[Burke]

Corp leases vehicle and gives it to employee for personal use. No business use involved, no accounting plan, etc. Employee must claim FMV on W-2 of leased vehicle as compensation according to amts designated in IRS tables, shown in Boxes 1,3,5 and all taxes required. No problem.

Issue is: what does the SCorp deduct? Actual cost of leased vehicle plus expenses paid (ins, etc) for 2012 is less than FMV for full year added to employee's W-2. (Last year it was about the same since there was a big downpayment up front.) Since SCorp did not actually pay remuneration to employee of full FMV of vehicle, is this figure subtracted from compensation shown on 1120S? And the actual cash expense they did pay is the deductible expense? Or is the expense disallowed in total as it is not ordinary nor necessary?

[kpangelinan]

I don't think it matters if the actual costs are less than what as claimed as the taxable fringe benefit.....the IRS has other ways of calculating this amount as you know, but in its most simple accounting and record keeping form, just include the full FMV leased amount in wages as you indicated you had and the corporation deducts actual expenses of the vehicle.

[Burke]

Thanks. That would mean I would have to remove the FMV value shown on the W-2 (from compensation claimed on the 1120S line for wages/salaries), and show the actual expense elsewhere, to come up with a correct bottom line. So it won't match to the 941's, but that may not be a problem. I am not sure there is a formal matching program there. And that is what I did last year.

[kpangelinan]

Thanks. That would mean I would have to remove the FMV value shown on the W-2 (from compensation claimed on the 1120S line for wages/salaries), and show the actual expense elsewhere, to come up with a correct bottom line. So it won't match to the 941's, but that may not be a problem. I am not sure there is a formal matching program there. And that is what I did last year.

Hey Burke, I'm a little confused.....I do a "TON" of these taxable fringe benefits every year and have for many years. I'm not sure I understand what you're saying. What I've done is have the corporation own and expense the vehicle as a normal operating expense, meaning the corp depreciates it and writes off all expenses relating to it regardless of personal use from the employee. Because it's so much easier to calculate the taxable fringe benefit by using 100% of the FMV, the client doesn't have to worry about log books and such....I have info regarding code on that if you want. But anyways, then the corporation includes the leased value of that vehicle as taxable wages to the employee, but not actually paid out wages. Are you saying that the company is not allowed to take the total W2 amount as a deduction or are you talking about a balance sheet for the 1120?

[Burke]

Hey Burke, I'm a little confused.....I do a "TON" of these taxable fringe benefits every year and have for many years. I'm not sure I understand what you're saying. What I've done is have the corporation own and expense the vehicle as a normal operating expense, meaning the corp depreciates it and writes off all expenses relating to it regardless of personal use from the employee. Because it's so much easier to calculate the taxable fringe benefit by using 100% of the FMV, the client doesn't have to worry about log books and such....I have info regarding code on that if you want. But anyways, then the corporation includes the leased value of that vehicle as taxable wages to the employee, but not actually paid out wages. Are you saying that the company is not allowed to take the total W2 amount as a deduction or are you talking about a balance sheet for the 1120?

In this case, the company leases the vehicle, it does not own it. However, the treatment is the same.

So my question is: what figure do you show on the 1120S for salaries/wages? Do you include the FMV since it is in the W-2? Then you are also deducting the depr, expense for the corp elsewhere? This would be writing off a phantom figure (the FMV) which the corp is not actually paying. I was not concerned about the balance sheet.

[kpangelinan]

In this case, the company leases the vehicle, it does not own it. However, the treatment is the same.

So my question is: what figure do you show on the 1120S for salaries/wages? Do you include the FMV since it is in the W-2? Then you are also deducting the depr, expense for the corp elsewhere? This would be writing off a phantom figure (the FMV) which the corp is not actually paying. I was not concerned about the balance sheet.

Now I know exactly what you're saying and now I'm going to have to try and get that answer...dang it.....cause you're right, it would appear that the corp would double dip, although after posing this scenario to a colleague, it could be argued that the corporation is losing value in the vehicle from personal use which could appear as an offset of value received to the employee receiving the benefit......may be reaching, but on the other hand, I've had these exact same scenarios fly through IRS audits without question BUT we definitely should have some definitives on the subject if we can. I'll try my yahoo group and see what they say.

[MichaelG]

Corp leases vehicle and gives it to employee for personal use. No business use involved, no accounting plan, etc. Employee must claim FMV on W-2 of leased vehicle as compensation according to amts designated in IRS tables, shown in Boxes 1,3,5 and all taxes required. No problem.

Issue is: what does the SCorp deduct? Actual cost of leased vehicle plus expenses paid (ins, etc) for 2012 is less than FMV for full year added to employee's W-2. (Last year it was about the same since there was a big downpayment up front.) Since SCorp did not actually pay remuneration to employee of full FMV of vehicle, is this figure subtracted from compensation shown on 1120S? And the actual cash expense they did pay is the deductible expense? Or is the expense disallowed in total as it is not ordinary nor necessary?

If I understand correctly, you have used the Annual Lease Value Method of determining FMV, which resulted in a larger amount than the employer's actual costs. But the Annual Lease Value Method is an optional method allowed by the IRS to allocate between business and personal use. As there is zero business use for this vehicle, I don't believe it is appropriate to calculate FMV using the Annual Lease Value Method. In such a case, why would FMV be any different from actual costs - assuming the vehicle is leased from an unrelated third party?

[Burke]

Because the IRS says so. I didn't say it was fair. The regs on this are pretty extensive, employee does not qualify for any other favorable method. You can download the IRS pub on Taxable Fringe Benefits for info. It is 91 pages long.

[Burke]

Now I know exactly what you're saying and now I'm going to have to try and get that answer...dang it.....cause you're right, it would appear that the corp would double dip, although after posing this scenario to a colleague, it could be argued that the corporation is losing value in the vehicle from personal use which could appear as an offset of value received to the employee receiving the benefit......may be reaching, but on the other hand, I've had these exact same scenarios fly through IRS audits without question BUT we definitely should have some definitives on the subject if we can. I'll try my yahoo group and see what they say.

It would definitely be reaching, IMO. But get me a favorable ruling, with a cite, and I will go with it!

[Maribeth]

I would make the entry on the books, debiting salary expense & crediting auto expense. That way the wages now agree to the 941's, 940's, W-2's etc.

In your case I believe the above entry would create a "negative" auto expense. I would list that on the other deduction line as a negative and worded something like this: auto reimbursements in excess of expenses.

Maribeth

[Nashville]

Unnessary Complications

I think we're falling into a trap of believing that employee taxable compensation must equal dollar-for-dollar the associated corporate expense. It does not.

If it cost the corporation $5000 in expense to pay for the car, then that is their deduction. If they pay this guy $60,000 annually in gross pay, then that is their deduction.

If FMV of the leased car is only $4600, then this guys' W-2 shows $64,600 in taxable income. The corporation still deducts $5000 lease expense plus $60,000 in compensation. No one has to beat their head against the wall accounting for the $400 difference. The difference can go in either direction. Simple as that. End of story.

Of course, we all know that's not the end of the story, what with Group Life over $50,000, s. 125 deductions, 401k contributions and all manner of garbage to clutter up this guys' W-2. Throw in tax-free parking that corporation might pay for its employees just to juice it up a little bit. But the principle remains the same: none of this changes the actual expense of the corporation, or their associated deduction.

KPAngelo, I think you had it right from the start....

[Burke]

I would make the entry on the books, debiting salary expense & crediting auto expense. That way the wages now agree to the 941's, 940's, W-2's etc.

In your case I believe the above entry would create a "negative" auto expense. I would list that on the other deduction line as a negative and worded something like this: auto reimbursements in excess of expenses.

Maribeth

That sounds entirely reasonable.

[Burke]

I think we're falling into a trap of believing that employee taxable compensation must equal dollar-for-dollar the associated corporate expense. It does not.

If it cost the corporation $5000 in expense to pay for the car, then that is their deduction. If they pay this guy $60,000 annually in gross pay, then that is their deduction.

If FMV of the leased car is only $4600, then this guys' W-2 shows $64,600 in taxable income. The corporation still deducts $5000 lease expense plus $60,000 in compensation. No one has to beat their head against the wall accounting for the $400 difference. The difference can go in either direction. Simple as that. End of story.....

I agree that employee taxable compensation does not have to equal dollar-for-dollar the associated corp expense. And I agree with the rest of your post. I just was concerned that if the figure on 1120S for wages/salaries deduction did not match the total of the W-2's or 941's, would that be a problem? Looks like some have been deducting the FMV included in total wages AND the actual expense of the corp, or $5K lease expense + $64,600 in compensation to use your example above.