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Company Owned Vehicle
If the company truly owns the car, then it must be titled in the company’s name. The IRS is cracking down on this, and it makes sense. If the company is the owner, then the company must be on the title. This might be a challenge with car loans and leases, but for the company to claim it as an asset and subsequent expenses the title needs to be in the LLC or S-Corp’s name. And if you buy the car yourself and then transfer it to the business, you might be on the hook for sales tax twice (technically).
This is a good example of rules getting in the way of common sense, so try not to freak out on the motor vehicles clerk when you are attempting to transfer title from you to the business. Another concern is higher insurance rates. It appears that most auto policies will charge a higher premium for cars owned by a business for business purposes. While the insurance companies are regulated and must demonstrate the need for the premiums being charged, the higher amount appears to be a money grab.
The numbers are slightly higher for trucks and vans. The depreciation numbers and revenue procedures are released in April for the current tax year. So, 2017 figures are released sometime in April 2017.
Vehicles that weigh more than 6,000 pounds but under 14,000 pounds may qualify for Section 179 deduction of $25,000 in the first year. Some medium-sized vehicles qualify for the full Section 179 depreciation deduction. These are non-SUV cargo trucks, vehicles that seat 9 occupants behind the driver’s seat (e.g., hotel van) and classic cargo vans. In addition, vehicles that weigh over 14,000 pounds, ambulances, large moving vans, delivery trucks, law enforcement or fire vehicles, among many others, also qualify for the full Section 179 deduction.
To take Section 179 depreciation the vehicle must have a greater than 50% business use. This might be one of the major obstacles for shareholders especially if they do not have another car. Another concern is that the business must have sufficient income to absorb the deduction (in some situations there might be enough shareholder basis to absorb it beyond income- this is complicated but we can help).
Don’t forget the other issue with depreciation is the recapture of depreciation- any gain on the sale of your vehicle (the difference between the original price less depreciation and the sale price) is taxable. The good thing is that most cars depreciate rapidly as they relate to fair market value or resale value. Work trucks and vans might not depreciate as quickly, so there might be some depreciation recapture on your gain when you sell the vehicle.
The depreciation issue has another element. One of the questions we asked previously was how often are you buying new cars. If you are the type of person who buys a new car every 2-3 years, then you know the pain of depreciation. The minute you drive the car off the lot it drops 10-15% in value. If you are automatically “losing money” by frequently buying a new car then deducting depreciation through your business is a huge windfall.
In the first two years you could deduct $16,260 (for the 2016 tax year). Your ownership model and level of comfort already allows for a loss, you might as well get the small business tax deduction. Said in a different way- you buy a new BMW 435 for $70,000 and two years later it is worth $54,000, and you sell it for $54,000. Since you’ve already taken $16,260 in depreciation you do not recognize a gain nor a recapture of depreciation. In this case your fickleness of needing a new car every two years put some money in your pocket via tax deduction.
But wait! There is a catch. A huge one that is a bit obscure. It is essentially an involuntary Section 1031 Like-Kind exchange where the second vehicle might not get as big of a deduction. See the Automobile Decision Tree later in this chapter for more details on involuntary 1031 exchanges.
You can also use the mileage rate, but there are strong limitations such as the fair market value of the vehicle must be below $16,000 (for 2015). That will preclude most vehicles. But let’s run the math anyways.
For example, you drove 15,000 miles and 5,000 miles were personal. You would need to add 5,000 miles x 54 cents (for 2016) which equals $2,700 to W2 income. And here’s the personal use kicker- if you are operating your car for less than the standard mileage rate (and you usually do), you will artificially be inflating your income.
Having a mixed use (personal and business) automobile be owned by the company sounds like a lot of work. Everyone at the Watson CPA Group likes French fries, but we won’t run a mile for just one. Let’s make sure it’s worth it. Will the tax benefit of depreciation in the first two years offset the additional imputed income? Perhaps.
Keep in mind that it is difficult to justify 100% business use of a vehicle if it is the only vehicle you own- perhaps in Manhattan, but not for most Americans. Even if you have another automobile at your disposal, it still might not make sense to have your company own it. The question boils down to how many miles you will drive versus your ability to accelerate your depreciation versus your marginal tax rate today and the following years. At the end of this section on automobiles is an overly simplified flowchart to help you decide (or confuse the situation more).
LLC Owned But Using Standard Mileage Rate
Let’s look at the myriad of rules where using the standard mileage rate method is not allowed. According to IRS Publication 463, you cannot use the standard mileage rate when you-
This makes sense. The IRS does not want you to exploit the system by claiming huge amounts of depreciation in the first year, and then switch to the possibly more lucrative standard mileage rate deduction. However, after the first year you can bounce back and forth depending on which method (standard rate versus actuals) gives your LLC a better small business tax deduction. Here is the link for the IRS Publication 463 (Travel, Entertainment, Gift, and Car Expenses)-
Again, if your LLC owns the automobile but is using the standard mileage rate and your LLC elects S corporation status for taxation, this asset needs an adjusted cost basis for depreciation within the corporation. Why? As an S Corp where the company owns the automobile, the company can only use actual expenses and depreciation is a part of that.
The calculation for determining the basis of the automobile is quite simple since the IRS publishes the depreciation amount within the standard mileage rate. Here’s the math-
In this example, if the LLC elects S corporation status on January 1 2016, an asset would be created on the S corporation’s balance sheet with an adjusted basis of $43,100. The depreciation schedule for an automobile is typically five years, but when you switch from standard mileage rate to actual expenses (e.g., LLC electing S Corp status) the IRS requires you to estimate the remaining useful life. This is another conundrum. In this example, somewhere between two years and five years would be reasonable.
We just went over a ton of stuff under the Company Owns the Vehicle section. Please look at a quickie decision tree later in this section.
Taxpayer's Comprehensive Guide to LLCs and S Corps