Big Vehicle Deductions for C Corporations & Employees

Some small businesses are organized as “C corporations.” This isn’t cost-effective for most, who go for the simpler ways of doing business as Sole Proprietorships, S Corporations or as Limited Liability Companies.

If your operation generates profits of six figures or more, the extra accounting, legal fees and paperwork might be worth the extra expenses of a C corporation. One nice benefit can be a “company car.” In that case, here is what you need to know, in a nutshell:

First, the rules for deducting vehicle expenses depend on whether the corporation or the employee owns the vehicle. For small business C corps, the employee and the stockholders/owners are usually one and the same. So, the question is which one holds the title to the vehicle.

  1. Corporation owned vehicles. A new BMW is a nifty perk for a corporate employee — especially if she can drive it to impress her friends off-hours. The corporation can deduct all of the BMW costs. The tax catch is that the value of the personal use portion is taxable to the employee. So, a mileage log must be kept showing the breakdown of business/personal miles driven.
  2. Employee owned vehicles. The other way to go is having the C Corporation reimburse employees for business driving of their personal vehicle. The reimbursement isn’t taxed as income to the employees, except to the extent of personal use. Again, record-keeping is vital.

Let’s do an example. Rory Calhoun is the one and only stockholder of Chromedome, Inc., and he is a full time employee. At tax time, Rory’s auto mileage log shows that he drove his personally owned Mustang Cobra 80% of the time for business and 20% for pleasure. Assume that Chromedome Inc tax-deducts and reimburses Rory $7,200. So, Rory reports 20% of the reimbursement ($1,400) as additional income. If Rory is in a mid range tax bracket, his additional federal income tax would be about $500. Considering the real costs of owning vehicles, this looks like a great deal for Rory and his corporation.

 

For more detail on C corporation vehicle deductions, see IRS Publication 463 (irs.gov) and my book, “Tax Savvy for Small Business” (Nolo) at Amazon.com and my website, taxattorneydaily.com.

Frederick W. Daily, J.D, LL. M (tax)
Frederick W. Daily, J.D, LL. M (tax)

Fred Daily is a tax attorney with over four decades of experience in the tax field. He has given tax programs for CPAs, Enrolled Agents and even the IRS. Fred has been quoted in the New York Times, Wall Street Journal, and has appeared on CBS, NBC, Fox, NPR news features and ABC’s Good Morning America. He is an author of books on taxes and his website, taxattorneydaily.com features a wealth of tax tips for minimizing taxes and dealing with IRS issues.