Auto Leases

[ConnorandCo]

Good morning, if an officer, who is the owner of a corporation, taxed as an "S", and a fellow officer lease there personal vehicles to the company for use by the company, what, if any, tax consequences does the taxpayer face in this situation. They are both new vehicles valuing between 40 and 60k. The leases were paid on an annual basis in the amounts of 12k and 16k. Can the business write off the full amounts of the lease payments? Also, is any of that payment to be reported on there W2's, or could they be looking at reporting that income on a Schedule E due to the year and value of the car, as well as the large payment?

[DaveinTexas]

Schedule C income, ouch!

Renting equipment or personal property that is not tied to (in conjunction with) real property is subject to SE tax, reported (most commonly) on a Schedule C. This would not, in my opinion, be reported on a Schedule E or on line 21 as Personal Property Rent. Others may disagree but we all know what the end goal is (to avoid SE or Payroll tax on the Rental Income).

The business, in your situation, can deduct the lease payments which will reduce overall profits of the S Corp and mean less distributive income to the shareholders. The Officer then reports the income on a Schedule C and lo and behold, they have turned distributive share of S Corp income (not subject to SE tax) into SE income (subject to SE tax).

The Officers would be better off either:
1. Taking a Profit Distribution equal to the amount of the lease payments and pay ordinary income tax on the distributions. These amounts must be equal according to their percentage of ownership so there may be a discrepancy in the amounts distributed.
2. Auto Allowance: Increase their W2 Wages equal to the Lease Payments (this will increase Payroll Tax).
3. Keep track of their business mileage and have the company reimburse them up to the Federal Rate (currently 54 cents/mile).
a. I like this option the best. If they are driving say, 15,000 business miles per year, this would equal a tax-free reimbursement to the Officers in the amount of $8,100. If they drove 20,000, this would be $10,800. This is nearly the amount of the lease payments AND it is deducted by the company AND tax-free to the Officers. Win/Win!

Also, keep in mind that some states (Texas does) requires the lessor of the equipment to charge sales tax on the lease payments for leasing personal property (8.25% in my neck of the woods)!!