S-corp Vehicle expense, owner officer...Huh?

[AuditorTurnedGood]

So, I have this "friend" who happens to own a tax practice, which is organized as an S-corp. He is the 94% owner, with his spouse owning the other 6%. He owns a car and uses it about 70% for business. Since he is providing services to the Corp, he will be W2'd for a salary. The car is owned by him, and the financing is in his name. How do I, err, I mean, he, deduct the costs? Within the S-corp, on Sch A subject to the 2% floor, some other way? Thanks all!

[ecb34691]

He'd turn in to the corp an expense report listing the miles and the corp would pay he .505 per mile as an expense and he has no personal income on this - it's called "an accountable plan". Make sure corp has it recorded somewhere in their meeting minutes.

[AuditorTurnedGood]

Doesn't the ownership percentage

prevent him from using an accountable plan? My understanding is that over 2% owners can;t use one. Is this only the case of no W2 is issued?

[veritas]

Welcome to our side

Mileage reimbursement is permitted. You may be thinking of lodging per diem which is not.

[Bees Knees]

Mileage reimbursement is permitted. You may be thinking of lodging per diem which is not.

Well that is not entirely true. The poster has a point.

TTB, page 8-12 says:

Related to employer. If the employee is related to the employer,
the employee must still be able to prove expenses to the IRS even
if expenses have been adequately accounted to the employer under
a per diem or car allowance plan, and any excess reimbursement
is returned. For this rule, an employee that owns directly or
indirectly more than 10% of the stock in a corporation employer
is considered related to the employer.

That is based on IRS Pub 463 which says:

Per Diem and Car Allowances

If your employer reimburses you for your ex-
penses using a per diem or a car allowance, you
can generally use the allowance as proof for the
amount of your expenses. A per diem or car
allowance satisfies the adequate accounting re-
quirements for the amount of your expenses
only if all of the following conditions apply.

• Your employer reasonably limits payments
of your expenses to those that are ordinary
and necessary in the conduct of the
trade or business.
• The allowance is similar in form to and not
more than the federal rate (defined later).
• You prove the time (dates), place, and
business purposes of your expenses to
your employer (as explained in Table 5-1)
within a reasonable period of time.
• You are not related to your employer (as
defined next). If you are related to your
employer, you must be able to prove your
expenses to the IRS even if you have al-
ready adequately accounted to your em-
ployer and returned any excess
reimbursement.

Not to panic. It merely means that for a more than 10% owner of a corporation who is also an employee of the corporation, there is one extra step in order to make a mileage per diem arrangement an accountable plan. The employee/shareholder must also be able to prove expenses. In addition to a good detailed mileage log, I suggest you have the shareholder/employee throw all of his/her gas and repair receipts into an envelope. Since many of us use a credit card at the pump when we fill up, that should do the trick.

[Bees Knees]

BTW, self employed individuals such as Schedule C and Form 1065 filers are not considered related to the employer. They can continue to use the standard mileage rate and throw away all receipts. The rule that you should keep all receipts only applies to employee/shareholders of a C or S corporation.