Do you operate your business as an S or a C corporation?
Do you drive a vehicle titled in your personal name for corporate business?
Beware. The Tax Cuts and Jobs Act (TCJA) changed the rules for tax years 2018-2025.
Before the TCJA, you had to pay attention to the use of your personal vehicle for corporate business in order to avoid losing deductions to the 2 percent miscellaneous itemized deduction rule and the alternative minimum tax.
But now, because of the TCJA, you face a narrow road during tax years 2018-2025 if you want tax benefits for the corporate business use of your personal vehicle.
1. The personal vehicle used for corporate business is a business vehicle to the extent of corporate use.
2. If you don’t want to lose your rightful tax benefits from your business use, your corporation must reimburse you for your business use.
3. Your corporation may reimburse you using the IRS standard mileage rate or actual expenses.
4. When you trade in or sell the vehicle you used for corporate business, you will report a taxable gain or claim a deductible loss on IRS Form 4797, as we explained in Case Study: Trade-In on a New SUV—Reimbursement by Corporation.
5. To obtain your reimbursements from your corporation, you submit expense reports under the accountable plan rules, as explained in TCJA Creates New Reasons for Accountable Plan Expense Reimbursements.
Make Sure to Do This.
You need a mileage log. The mileage log defines the dollar amount of the corporate reimbursement—regardless of whether you seek reimbursement using (a) actual expenses or (b) the IRS mileage method. The mileage log saves you in an IRS audit.
For what’s involved in the log, see What Is the Unpardonable Sin in an IRS Audit?
Reimbursement for Business Basis.
You may remember Joyce from the SUV trade-in article mentioned above. Once she found her 80 percent business basis, she had four choices for obtaining her 2020 reimbursement of her $45,164 basis, as follows:
1. $45,164 under the 100 percent bonus depreciation rules;
2. $29,753 ($25,900 for Section 179 expensing plus $3,853 for modified accelerated cost recovery system, or MACRS, depreciation—Joyce can choose her Section 179 deduction by any amount up to the $25,900);
3. $9,033 for MACRS depreciation;
4. or $4,516 for straight-line depreciation.
Planning note. Reimbursements after Year One for options 2, 3, and 4 are based on the combination of (a) the business use percentage and (b) calculated depreciation amount for those years.
Reminder. As explained in the article linked above, the corporation deducts the reimbursed amount and Joyce reports no income.
Enhanced Expense Report for Reimbursements of Personal Vehicle Basis
When having your corporation reimburse you under the actual expense method for your business use of your personal vehicle, you must submit an enhanced expense report to the corporation for the depreciation component of the vehicle.
Neither the tax code nor the IRS in its regulations gives guidance on this, but Private Letter Ruling 200930029provides a great road map on what’s needed. Using this ruling as a guide, the expense report must include.
- a receipt for the vehicle purchase that shows your ownership and the cost of the vehicle;
- a statement of recognition by you that the reimbursements of Section 179 expensing and/or bonus or other depreciation reduce the basis in your vehicle for purposes of gain or loss;
- a statement of recognition by you that you will reduce the overall annual Section 179 limits that apply to you and your spouse on your personal tax return by the amount of Section 179 expensing reimbursed by the corporation to you;
- a statement of recognition by you that if business use of the vehicle drops to 50 percent or less, you will reimburse the corporation for the required recapture of deductions in excess of straight-line depreciation (this requirement disappears when five years have passed or when you sell or trade the vehicle); and
- a mileage log that proves your percentage business use of the vehicle.
To assist with your submission of the vehicle expenses to the corporation as in the bullets above, consider using our sample enhanced expense report for a personally owned vehicle.
Because your corporation is reimbursing you for your personal vehicle, using either IRS mileage rates or actual expenses, it needs an accountable plan.
With such a plan, the reimbursement of depreciation under the actual expense method needs the enhanced expense report we mentioned above.
For the out-of-pocket expenses, such as gas, insurance, and repairs, your corporation needs to have an accountable plan, which can be as simple as requiring timely expense reports or a document stating that the corporation allows reimbursement of certain employee expenses.
During the year, you will generally list your vehicle operating expenses on the expense report. For more on this, see TCJA Creates New Reasons for Accountable Plan Expense Reimbursements.
Before we go on, let’s quickly review the reports you will submit to the corporation to audit-proof your corporation’s reimbursements of your personal vehicle:
- Mileage log
- Enhanced vehicle expense report for reimbursements of depreciation
- Expense reports under the accountable plan method for vehicle operating expenses, parking, and tolls.
If the corporation reimburses you using the mileage method, you need to submit your mileage—and also your parking and tolls—under the accountable plan rules.
Why Is the Title in Your Personal Name?
You may have started a new corporation, and that’s why the vehicle title is in your personal name.
Or perhaps you already operate as a corporation but face a situation where it’s better to buy a vehicle in your personal name rather than in the corporate name. This could be because of legal issues, financing terms, insurance rates, or any number of other reasons.
Reimbursements from the Corporation
A corporation can reimburse an employee for all expenses allowable under sections 161 to 199 of the tax code—which includes Section 179 expensing and Section 168 bonus and other depreciation.
Here’s what happens when your corporation properly reimburses you for the expenses:
- You, as the employee, receive the cash reimbursement from the corporation but do not have taxable income from the reimbursement.
- The corporation gets the full deduction for the reimbursed expenses.
- If the corporation is an S corporation, then those expenses reduce the corporate income and the corporation passes that reduced income to you—say, as the sole shareholder of your S corporation.
Technical Note for Tax Geeks
The accountable plan allows the employer (your corporation) to reimburse expenses under part VI of subchapter B of chapter 1 of subtitle A of the tax code.
Included in that part of the tax code are Section 179 expensing and Section 168 depreciation, including 100percent bonus depreciation.
Section 179 does not require the S corporation to obtain title to the property to expense it. Section 179 requires only that the corporation incur the cost for qualifying property that is predominantly used in the conduct of the business.
Private Letter Ruling 200930029 does a good job of explaining this IRS-endorsed reimbursement of Section 179expenses.
The Ralph M. Parsons Company reimbursed Milton Lewis $14,007 to cover 60 percent of the depreciation and maintenance expenses on the home that he used for business entertainment.(Home entertainment no longer qualifies for the home-office deduction, but this case does illustrate the allowability of the depreciation reimbursement.)
In IRS Private Letter Ruling 6406174570A, the IRS ruled that a college could reimburse a professor for his home-office expenses, including depreciation.
A Note on the Mechanics
Neither the Section 179 deduction nor depreciation shows on either the corporate or the personal tax return. It is are imbursement of an employee expense.
On the corporate return, you have two choices for labeling the reimbursed vehicle expenses in the other deductions section:
1. Vehicle expenses
2. Employee reimbursed expenses
Remember. The employee reduces his or her basis in the vehicle by the amount of the Section 179 or depreciation deduction and faces recapture if business use declines to 50 percent or below.
Wow! You can buy the business vehicle in your personal name and have the corporation reimburse you just as if the corporation had purchased the vehicle.
To audit-proof the reimbursement, you need to submit to the corporation
- operating expenses, following the general requirements for an accountable plan (think expense report); and
- an enhanced expense report for Section 179 expensing, bonus depreciation, and MACRS or straight-line depreciation.
When having your corporation reimburse you for Section 179 expensing and/or depreciation, consider using our sample enhanced expense report for a vehicle, where you
- certify business use,
- recognize the Section 179 expense and/or depreciation limits,
- decrease your vehicle’s basis by the depreciation and/or Section 179 deductions, and
- state that you will keep your business use at more than 50 percent for the required period, or will reimburse to the corporation any tax-law-required recapture of Section 179 expensing or depreciation deductions.