TheTaxBook & Depr. Bus. Use

[OldJack]

First as a long time user of QF, let me say I am impress with TheTaxBook. Although I have both books this year I will be reevaluating my purchase of QF next year.

I am disappointed with the subject of vehicle depreciation as it relates to a vehicle owned by a corporation (C-corp or S-corp) and used personally by an employee. Personal use is a fringe benefit that requires adding the vehicle benefit (unreimbursed) to the employees W2 gross subject to all payroll taxes.

The key point here is that the business use percent for the corporate vehicle depreciation deduction is 100% when the benefit has been added to the W2. I don't see this mentioned anywhere in the deluxe edition. In fact looking at the book examples would imply business use was 100% less personal use %.

[Bees Knees]

The information in the Small Business Quickfinder, page J-9 (2004 version) is misleading. It states: “Partnerships and corporations can treat vehicles used by employees as being used 100% for business purposes if the value of personal use is included in the employee’s gross wage.” It is misleading because it is taken out of context.

It is similar to the Form 4562 instructions which say:

“Column (c) — Business/investment
use percentage.

….Treat vehicles used by
employees as being used 100% for
business/investment purposes if the value
of personal use is included in the
employees’ gross income, or the
employees reimburse the employer for
the personal use.
Employers who report the amount of
personal use of the vehicle in the
employee’s gross income, and withhold
the appropriate taxes, should enter
“100%” for the percentage of business/
investment use.”


The problem with taking it out of context is that it implies you get to deduct 100% of the vehicle depreciation.

Yes, that sort of is true. Although TheTaxBook does not specifically mention this, it makes a more accurate statement on page 13-25 where it says: “Taxable portion of a fringe benefit. The value of a fringe benefit that is included in the employee’s taxable compensation is determined by subtracting from the total value, the amount that is excludable under the law and any amount the employee paid for use of the benefit.”

Simply stated, taxable fringe benefits are treated as W-2 wages. Pure and simple. You deduct the cost of the benefit provided by the employer by treating it as taxable W-2 compensation to the employee. This is true for vehicle depreciation as well as employee discounts, moving expenses, or any other fringe benefit that may or may not be treated as taxable compensation on the W-2.

The QF implies you do that PLUS deduct 100% of the depreciation on the vehicle, which is not true. The instructions to Form 4562 are dealing with the specific mechanics of how to deal with the business percentage questions on the 4562. It is simply stating that if you are going to add these costs to the employee’s W-2, you treat it on the 4562 as 100% business use. But that does NOT give you a double deduction: once on the W-2 and then a second time on the 4562 as it is added to the depreciation expense deduction on the 1120 or 1120S. The depreciation allowed on the 4562 applicable to taxable employee compensation is reflected in the amount you add to employee compensation on the W-2, which in turn translates into a deduction on the 1120 or 1120S as wages paid. That amount then needs to be subtracted from total depreciation from the 4562 for other depreciation claimed.

It is similar to the principle where you subtract the amount of depreciation claimed on the 4562 from total depreciation if it is claimed elsewhere on the return, such as in the cost of goods sold deduction.

[OldJack]

response to Bees Knees post

The basics of your contention is sound but you must not have dealt with the mechanics of the situation.

Yes, the fringe benefit is added to the W2 as Wages and subject to payroll taxes... the key here is the word "added" as you don't write a check to the employee for the benefit and you are not deducting the benefit on the tax return as "wages" because your wages book account does not have the fringe benefit included (or there is an offset in another account). If you were an accountant you would know that when you debit something in the books you have to credit something. In this case you debit wages for the fringe benefit and credit wages or auto expense so you have "netted" and not really deducted anything other than the employer share of the payroll taxes (employee share is a receivable).

You do deduct 100% business use depreciation (limitations still apply) as that is the deduction that is allowed by the code.

[Bees Knees]

I stand corrected.

IRS Pub 525, page 4, under Fringe Benefits, Form W-2, says “your employer reports your taxable fringe benefits in box 1 of Form W-2. The total value of your fringe benefits may also be noted in box 12.”

The same language is found in IRS Pub 15-B.

However, even though these Pubs say the employer treats these as W-2 wages, subject to payroll taxes, and included on the 941, neither Pub mentions the mechanics of the employer’s deduction.

Regulation Section 1.162-25T(a) does. It says: “If an employer includes the value of a noncash fringe benefit in an employee’s gross income, the employer may not deduct this amount as compensation for services, but rather may deduct only the costs incurred by the employer in providing the benefit to the employee.”

The reg goes on to give an example of an employer provided vehicle that is taxable to the employee and included in the employee’s W-2. Example 2 says the employer may not deduct the amount added to the W-2 as compensation, but may determine a cost recovery deduction under section 168, subject to the limitations under section 280F.

This makes sense in the case of a luxury vehicle. Let’s say an employee is given a $100,000 sports car as a taxable fringe benefit. The value added to the employee’s W-2 may far exceed the deduction allowed under Section 280F. Treating the deduction as compensation would defeat the depreciation limitations imposed by Section 280F.

Therefore, I agree, taxable fringe benefits added to an employee’s W-2 wage cannot be deducted as compensation. It has to be deducted under the rules specific to the nature of the cost of the benefit.

[OldJack]

Bees Nees is correct that the fringe benefit added to the W2 is not a deduction to the employer as the employer did not pay that amount, rather the employer simply incurred the actual expense of the benefit (ie: auto expense and/or auto depr.).

The amount added to the W2 is not the same as the depreciation portion used for business. The amout added to the W2 is commonly based upon the IRS's "Annual Lease Value" chart for the vehicle and has nothing to do with actual auto expenses (other than FMV) or depreciation of the auto.

As an additional note the entry to add it to the W2 should be recorded on the corp books to account for withholding of payroll taxes for the W2 entry. If you fail to withhold payroll taxes you must add that fact that payroll taxes were not withheld by noting them in box 12 of the W2 as code A and code B for the FICA and Medicare tax "Uncollected". Thus the taxpayer has to pay those taxes on his 1040 line 63. Of course the "Fringe Wages" should be added to the quarterly form 941 so the IRS gets their taxes withheld and the employer portion due.

As an example the amount added to the W2 gross for a vehicle.. say a 40% personal use of a $25,000 (FMV) SUV would be $6,850 (annual lease value per chart) * 40% personal use* (365/365 days used)=$2,740+gas @ 5.5¢ if provided by the employer. Therefore on the corp books the payroll earnings record for W2 gross would get $2,740+ added (less employee reimbursement if any) with an offset in the fringe benefit account (auto expense, wages, or even a case could be made for the reduction of depreciation on page 1 of the 1120). However, since you can depreciate the vehicle as 100% business use you may take §179 and write off the entire $25,000 as depreciation even though the employee used the vehicle 40%.

I don't understand why TheTaxBook would not include this long-standing and valuable tax information under the depreciation tab, employee benefits tab, or automobiles tab? Do TheTaxBook authors disagree?

[Scarecrow]

Therefore, I agree, taxable fringe benefits added to an employee’s W-2 wage cannot be deducted as compensation. It has to be deducted under the rules specific to the nature of the cost of the benefit.

The 1120S instructions for line 18 come right out and say to deduct taxable health insurance benefits for a more than 2% shareholder as wages on lines 7 or 8, not on line 18.

That seems to contradict the rule that it is not deductible as compensation.

[OldJack]

A good point Scarecrow. The key word there is "insurance benefits" because the S-corp actually paid the benefit so it deducts the benefit on line 7 or 8 and the wages line and W2, I suppose because it is equal to the actual benefit incurred. Maybe it counts as part of the "reasonable salary", I don't know. The S-corp expense is in reality simply being passed through to the 1040 for deduction.

If you look at the S-corp tax return you will see that by reporting it on the W2 as income and noting it as health insurance in box 14 (or whatever box the instructions say), the shareholder is allowed to deduct the benefit on his tax return on page 1. When he reports the income from his W2 it is in effect netted by adding back to the profit that was lower by the deduction of profit from the S-corp reported on 1040 Sch-E to arrive at the true net taxable profit on page 1 of the 1040 (without the insurance deduction). The end result of the insurance cost on the 1040 is simply the health insurance deduction. This was important when 100% of a self-employed person insurance was not deductible on the 1040.. now it really just causes confusion and ends with the same tax result as if it was not added to the W2.