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Get Reimbursed By The Mile
This might be the best option, especially if Section 179 depreciation is not going to benefit you much and/or you use the car personally more than you use it professionally. As the owner of the vehicle, you would submit expense reports in the form of mileage logs. If you are a smart vehicle owner, you would also use a smartphone app to keep track of your miles for you. Keep in mind that the IRS wants corroborating evidence to support your mileage logs, so keep those Jiffy Lube receipts or other service records showing odometer readings near the beginning and end of the year (so extrapolation can occur). Just whippin’ out a pretty color-coded spreadsheet during an IRS examination is not enough.
The company would reimburse you according to your mileage log submission. This can be a great option for a lot of reasons. First, you are reducing the net income of your company, and if you are an S-Corp the lower business income could decrease the amount of reasonable salary you must take as a shareholder. Second, older cars generally operate for less than the Federal mileage rate.
Let’s look at some numbers-
So you just took home $1,980 tax-free. All legit. All legal. AAA might consider these operating costs to be too low, but then again this would be representative of an older or thrifty vehicle. Why is that? In 2015, the IRS designated $0.24 of the $0.575 standard mileage rate to be depreciation of your vehicle (almost half). Therefore, if you have a $5,000 POS which will be worth $5,000 ten years from now, you are getting reimbursed for depreciation that never happens. Cool! 10,000 miles would be $2,400 in your pocket free and clear.
Quick recap: you took money out of the business tax-free and you reduced your company’s overall taxable income through legitimate small business tax deductions. And if we are using net business income after expenses as a jumping off point for determining a reasonable S corporation salary, that salary starts off at a lower number and subsequently reduces Social Security and Medicare taxes (among others). Win win!
Wait! There’s more. Really, Jason? Really!
Third, this is better than simply taking the mileage deduction on your personal tax returns. Any mileage deduction is completed within Form 2106 (Employee Business Expenses) on Schedule A. So, first you need to be able to itemize your deductions by exceeding the standard deduction. Next, any Form 2106 expenses (such as home office, mileage, cell phone, internet, meals, etc.) must exceed 2% of your income, and only that portion that exceeds 2% is deducted.
So, if you make a $100,000 as a household, the first $2,000 in mileage is not deducted. If you get reimbursed from your LLC or S Corp, all the mileage expense is deducted at the corporate level. This directly improves your tax consequence as a shareholder.
Another consideration is AMT (Alternative Minimum Tax). AMT calculations are performed on relatively low income amounts and while you might escape it every year, there might be a time where your Form 2106 expenses on Schedule A are limited because of AMT. So you could claim 15,000 miles or 25,000 miles, and your itemized deduction might be the same. Bummer. Don’t mess around with Form 2106 deductions when you own a business. Reimbursements are always better than deductions.
There is some confusion out there about getting reimbursed for actual expenses. For example, a business owner will own the automobile personally but wants to get reimbursed for actual expenses. This same business owner will use the company credit card for gas and oil changes. This is bad. If you want to get reimbursed for actual expenses, it must be a pro-rated amount. If you drive 18,000 miles and 12,000 are business miles, then the company should only reimburse 75% of all actual expenses.
If you have leased your vehicle and you use the standard mileage rate for reimbursement, you must continue with that method for the entire lease term. This is contrast to owning the vehicle where you can bounce and forth between actual expenses and standard mileage rate (subject to the rules previously discussed).
Your company must have an Accountable Plan to take advantage of the You Own the Vehicle, Get Reimbursed scenario. As a general rule, any payment of an allowance or reimbursement of business expenses for which the employee does not provide an adequate accounting (i.e., substantiation with receipts or other records) is considered to have been provided under a non-accountable plan and is required to be treated as taxable wages for purposes of federal, state, and local (if applicable) income tax withholding, Social Security and Medicare taxes, and federal and state unemployment taxes. Yuck!
Taxpayer's Comprehensive Guide to LLCs and S Corps