Tax Issues to Consider when Buying or Replacing a Vehicle

FIRM1040 Blog

Tax Issues to Consider when Buying or Replacing a Vehicle

April 23, 2017

 

First, should you own the vehicle in your personal name, or should you have your corporation own the vehicle?

 

Let’s say that it makes financial sense for you to own the vehicle personally.

 

In this case, you could deduct the vehicle expenses on your personal tax return or have the corporation reimburse you. I don’t recommend the personal tax return deduction for three possible reasons:

 

  1. You could receive no deduction at all because the alternative minimum tax disallows all miscellaneous itemized deductions. (This is pretty outrageous, but that’s the way it is.)

  2. You could receive no deduction if you don’t itemize for the year.

  3. You could receive a reduced deduction because you lose 2 percent of your miscellaneous itemized deductions to the adjusted gross income floor.

 

The best alternative is to have the corporation reimburse you for the vehicle expenses. This is true regardless of your method of deduction (IRS standard mileage rate or actual expenses).

 

Here’s what happens when your corporation properly reimburses you for the expenses:

 

  1. You as the employee do not have taxable income.

  2. The corporation gets the full deduction the law allows for the expenses.

  3. If the corporation is an S corporation, then those expenses reduce the corporate income, and the corporation passes that reduced income to you—the sole shareholder of your S corporation.

 

To make this work at the corporate level, you need the corporate reimbursement of

 

  • operating expenses, such as gas and oil and insurance, to follow the general requirements for an accountable plan expense report; and

  • Section 179 expensing, bonus depreciation, and MACRS depreciation to follow an accountable plan enhanced expense report.

 

If you are looking for your corporation to reimburse you for actual expenses (perhaps even Section 179 deductions and/or bonus depreciation).

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