Transfer of vehicle title to S Corp owner

[Penelope]

Owner wants to undo what he considers to be a mistake by his prior accountant: Purchase of vehicle was treated as owned by his S Corp, not himself. In addition, ACTUAL vehicle expenses and depreciation were deducted on the corporation tax return. Owner drives over 30,000 business miles per year and would be better off using the mileage method. According to the rules, you can't switch from actual to mileage method after the first year; also the standard mileage method can't be used by corporations. He doesn't want to amend the 2004 return, when this first happened.

Therefore, he wonders if he can transfer title to himself, and "start fresh," using the mileage method from now on.

He also wonders if he will owe any sales tax on the transfer.

The net book value of the vehicle at the proposed date of transfer was $12,681, but he thinks the 2002 Ford Windstar minivan was only worth $9,960 (He looked it up on Edmunds.com for private party sale, with appropriate adjustments for high mileage, etc.)

I'm not sure how to treat the transfer on the books and for tax purposes. I told him the transfer would have to be an "arms length" transaction.

Thanks for any guidance.

[Penelope]

Form 2106 Mileage deduction limited on Sch A

I just remembered this -- The taxpayer will lose part of the deduction because of the 2% floor on Sch A for job related expenses. (Taxpayer is an employee of S Corp.) I don't know what the taxpayer's adjusted gross is this year -- probably over $150,000-- but the mileage is so high that it would probably still result in a larger tax deduction.

[jerome]

If the corporation owns the vehicle, it is a taxable sale to liquidate it and give it back to the shareholder. You can’t amend a tax return to undue an ownership issue. Either the S corporation owns the vehicle or it does not.

[rosieea]

I just remembered this -- The taxpayer will lose part of the deduction because of the 2% floor on Sch A for job related expenses. (Taxpayer is an employee of S Corp.) I don't know what the taxpayer's adjusted gross is this year -- probably over $150,000-- but the mileage is so high that it would probably still result in a larger tax deduction.

To avoid the 2% floor, use an accountable plan & have the Corp reimburse the employee for mileage. Deductible by the Corp & not income to the employee. Make sure the plan is written & adopted in the Corp minutes.