Personal Auto S-Corp

[geekgirldany]

I went back and searched the forum for an answer. I'm still not exactly sure how to go on this.

New customer started S-Corp in 2006. Truck used in business is in personal name of shareholder. Shareholder has paid all fuel, insurance, and repairs out of business. A few truck payments have been made. Maybe 4 since he incorporated in July 06. Truck was orginally purchased in 2005.

How should I go on this since the truck in not in the name of corporation? The customer did not take a payroll. Can the S-Corp still reimbursed based on mileage to the shareholder even though he was not an employee for that year? I noticed someone mentioned in another post they use the standard mileage rate and then deduct that from the actual expenses that the corp paid. Excess is carried to a draw/distribution account.

Thank you for any help.

[Corduroy Frog]

Client's Choice

Geek, I have the same problem with nearly all my corporations with respect to owner's vehicles. Insurance companies charge nearly DOUBLE the premium if the vehicle belongs to a corporation. Unless they own the vehicle personally, they can't insure on the same policy with the other vehicles. So the owner tells the insurance company this is a "family" car. The tags are purchased in the owners' name.

Now comes tax time, and all-of-a-sudden they want to deduct everything including depreciation (which a non-owner cannot deduct).

Here is how I handle it, and others may do it differently. Treat all automotive items paid as personal draws. Period. Even the vehicle payments, or more accurately, ESPECIALLY the vehicle payments. Then CREDIT the personal draws for the mileage rate times the number of miles supported. I discourage using 100% of the mileage unless the vehicle is equipped in a manner which makes personal usage inconvenient or uncomely.

Over course of time, the mileage rate is usually more than fair to the taxpayer, so long as he is driving a car or small truck, and the taxpayer doesn't trade it in every couple years.

If the vehicle is a very large truck or so large it requires apportioned tags, the taxpayer will do better taking actual expenses. So he loses unless he is willing to title the vehicle as owned by the corporation.

If the corporation is titled as the owner, I try to take actual expenses, except for the principle portion of the payment. If the vehicle obviously lends itself to personal use (including commuting to work), there is a mileage rate for annual personal mileage which should be added onto the driver's W-2.

I tell the client it is his choice, and outline the treatment under each choice. Many times the owner thinks you should just do it the way he wants (even though he wouldn't dare approach his insurance agent the same way). But I hold the line on the above.

Hope others will answer you -- be interesting to see how others handle this.

[geekgirldany]

Thanks so much Frog for answering. I just wasn't sure what to do since he didn't pay himself a payrolI and I wasn't sure he could be reimbursed. I think he is going to be better taking mileage in the long run. He drives the truck alot and he did say when I was trying to find out information on the autos that he would rather do mileage. Thanks again.

[ChEAr$]

one thing more

For a corporation to deduct mileage paid to "general manager', said individual must be
a salaried employee, even if salary is low, do it so IRS can't balk upon audit. Of course
we still have to keep on owner to take reasonable salaries also if their are profits.

But.... must have an accountable plan in place, written and approved by board of
directors.

[geekgirldany]

He did not take a salary in 2006. But I have explained to them that this year they need to start planning for it.
Can the mileage still work even with no salary?

[JG EA]

I've noticed that (especially in the first year and also if on extension) that some will issue a late 1099-Misc to at least cover the SS/Med. They are still not in compliance because of FUTA, SUTA, etc. but it is a start.

Begin payroll as soon as possible for 2007. The quarters paid in are very important I've been told.

[Bees Knees]

For a corporation to deduct mileage paid to "general manager', said individual must be
a salaried employee,

I agree. According to Pub 463, page 29, an accountable plan is an arrangement between an employer and an employee. If the shareholder is not an employee, then it is a non-accountable plan and the corporation would have to issue a 1099-MISC for all reimbursements to the shareholder.

Make your client take a token salary.

[ChEAr$]

furthermore,

I agree. According to Pub 463, page 29, an accountable plan is an arrangement between an employer and an employee. If the shareholder is not an employee, then it is a non-accountable plan and the corporation would have to issue a 1099-MISC for all reimbursements to the shareholder.

Make your client take a token salary.

If the shareholder IS an employee and gets a 1099-misc, then he gets to deduct
mileage/expenses on form 2106 and of course declaring the 1099 amount as a
reduction. But.....

If shareholder is not an employee, merely an investor, then it's income, with
no offsetting deductions. For example, if I used my car to perform some helpful
activity for AFLAC (headquartered here locally), and they gave me a 1099 misc
for that mileage, it would just be volunteer work in my capacity as a stockholder.

Unless someone knows of a regulation that would permit a shareholder to deduct
expenses. (grin)

[geekgirldany]

I just did a research call to NATP. He said I could do three things:

1) Do a section 351 transfer of the truck. But then I will have to look at the adj, FMV, and if the liability is more than FMV. He said only do it this way if they will be regularly using the truck in the business only.
2) Say that the expenses paid are a loan from the Shareholder and then have the company pay the shareholder back. He said something about making sure it was a loan and not capital.

I don't think I can do a Section 351 because the customer says they can't find the paper work on the truck. It was originally purchased in 2005. Plus he talks like he would like to do mileage for this year. I guess a loan would be the way to go. But I have never thought of doing this.

[Corduroy Frog]

Accountable Plan

I knew if enough people responded to Geeko's post, the "Accountable Plan" would come up. Most of us are familiar with it, and if we've ever been employees, we have noted the detail with which we filled out expense reports. An employer thus has an "accountable plan."

Let's switch to the Geek's real world. And mine. And yours.

Your client is one of those who drives his pickup truck all year long and has it titled in his own name. While he is in the office, you see it out your window. Obviously, not what he takes his family to Pizza on Friday night, ideal for driving to various job sites, OK for a little occasional personal trips with fishing gear to the river.

You tell him his best option is to deduct mileage.

"BillyBob, how many miles did you drive for business this year?"
"Dunno."
"How many total miles didja put on it."
"Oh, about 20,000."
"OK, how many of those were for personal use?"
"None of 'em. I only drive to the jobsite."
"We better take a little for personal mileage."
"OK, what about 10% for driving to the Golf Course and here 'n there."
"I'll take 48.5 cents for 18,000 miles then. But you must have an accountable plan.
"A Whhhhaaaaat?"
"An accountable plan. IRS says you have to record every trip in the truck, or else batch your trips together where mileage can be calculated and supported."
"A man would go crazy doing that. Why don't you just take everything I spent??"

OK tax practitioners! Where would you go from here?? Make him "eat" the mileage and not deduct anything because he hasn't recorded every trip? or what??

[Bees Knees]

OK tax practitioners! Where would you go from here?? Make him "eat" the mileage and not deduct anything because he hasn't recorded every trip? or what??

I'd say "Look BillyBob, its hot...here's the deal. 18,000 x 48.5 cents is a deduction of $8,730. In your self employment business, that will save you about $3,000 on your federal return.

How long would it take you to write in the mileage in a log each day? 15 seconds per day? Times 365 days per year, assuming you work every day, that means it will take you about an hour and a half per year to do that, or in other words, you can make $2,000 per hour writing down your mileage deduction.

You know of any better way to make $2,000 per hour?

Just follow the rules BillyBob.

[ChEAr$]

You see, it's like this.....

What girlgeekdanny forgot to mention, is that the vehicle was bought from
Junior Samples down the road from her, and the odom-o-meter in that
truck was broken.

However, for veri FI cation of the mileage, just pick up the phone and
call BR-549 and ask for Junior.

[geekgirldany]

That's pretty good!

[lowergm]

The way we handle it in our firm is to:
1-Be sure we advise the s-corp to have a written auto lease in place spelling out exactly what the corp is to pay for (a set lease payment per month, which usually ties to the car payment, insurance, fuel, maintenance, etc)

2- Corporate minutes to approve the lease

3 - have the monthly lease payments paid to the shareholder rather than the finance company directly

4 - The s-corp issues a 1099-MISC to the shareholder showing the monthly lease payments in box 1-rent

5- Include the monthly payments in the shareholder's individual F-1040

This usually discourages them from continuing the practice of paying personal car payments out of the s-corp.

RML