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R. Klein, EA
R. Klein, EA, Enrolled Agent
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Experience:  Over 20 Years experience
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Dear Guru,What difference will it be for me to purchase

Resolved Question:

Dear Guru,

What difference will it be for me to purchase a $225K vehicle either through my company or through my personal bank account? I understand that insurance will be different between commercial and personal but other than that is there any reason I should not through a company? Could I purchase the vehicle with my company then resell, transfer, etc... to myself later? Please give me a detailed checklist of what you would advise and why. Thank you!
Submitted: 1 year ago.
Category: Tax
Expert:  Lindie-mod replied 1 year ago.
Hi,
I'm a moderator for this topic. I've been working hard to find a Professional to assist you with your Tax, but sometimes finding the right Professional can take a little longer than expected.
I wonder whether you're ok with continuing to wait for an answer. If you are, please let me know and I will continue my search. If not, feel free to let me know and I will cancel this question for you.

Thank you!
Lindie
Customer: replied 1 year ago.

Okay to wait thank u

Expert:  Phillip B, EA replied 1 year ago.
Thanks for using JustAnswer.com!

Is this vehicle a personal passenger automobile or a business only vehicle like a diesel rig?
Expert:  R. Klein, EA replied 1 year ago.
Thank you for contacting me about your Tax issue. I will work hard to help you understand the issue clearly.

If this $225K vehicle is a high-end car like a Bentley or some other personal vehicle, consider purchasing it personally.

If you had such a vehicle in your business-name and were audited by the IRS, the IRS likely would fairly conclude that your business use of such a vehicle would not qualify for a deduction since it is not either "ordinary or necessary" to have such a high-end vehicle for business. It would be too much luxury, unless you are in the business of selling such vehicles as your ordinary course of business.

Again, assuming this is some ultra-luxury vehicle, you could still have your company reimburse you for your pure business-related expenses of the vehicle, such as using the standard mileage method on an accountable plan. This would make the business's share of the costs the same as if you used a more common less-expensive vehicle.

Regardless of the type of vehicle you use, if it is used less than 50% of the time for business, if purchased in the business's name you would have a few likely effects:
1) Personal use of the vehicle may be taxable to you as owner's compensation
2) Local Ad valorem (personal property) tax would be assessed on the full vehicle value by your local government each year.

You also risk the fact that you may be construed as mixing personal and business assets and using the business as a "personal piggy bank" to fund your luxury purchases. This could lead to an involuntary loss of (piercing of) the corporate veil for protection of your business related assets.

Customer: replied 1 year ago.

Thank you for your detailed answer. If one was to purchase this ultra luxury vehicle but either:


 


A) Sell the vehicle for a profit (for the company) and not drive it.


 


B) Purchase but payback the entire amount of the vehicle.


 


Would that still be not okay?


 


Can a company not purchase an ultra luxury vehicle of that sort unless it is strictly a rental or dealership of some sort?


 


It sounds like the only okay way is to purchase it personally but what if you use the car for advertising purposes such as company logo painted on car and meeting with potential vendors/clients?


 


Please clarify. Thank you for your help.

Expert:  R. Klein, EA replied 1 year ago.
A company can purchase anything it wants! Racing Porsche, Bentley, Indy racing car.

The problem is, that none of these items pass the "smell" test of "Ordinary and Necessary" in MOST business situations. You would not win the argument that you NEED a Bentley to drive to court that you could not do in a $45K Acura just as easily. It is not NECESSARY to have such a high-end vehicle. As a result, only the ORDINARY and NECESSARY portion is tax deductible, and the remainder would be considered "personal use". Notice I did not say you could not buy such a vehicle.

If you sell the vehicle for a profit, your company has additional income --perfectly legit. But if you wrote off depreciation before selling it, your profit is that much larger on sale.

You could purchase the car with company funds as long as you recognize that this is a "shareholder loan" or "partner loan" that must be paid back. You should evidence the loan with written paperwork and a repayment schedule.

A loan never to be paid back or on an unreasonable schedule with no interest is considered owner compensation....fully taxable to the owner as wages.


Customer: replied 1 year ago.

Dear Randall,


 


Thank you and obviously I am seeking your wisdom as the tax professional as I am unclear for these delicate matters :D haha. Now, as long as one does not try to write an inappropriate amount of it off on the company. If the owner of the company did do that and evidenced this "loan" with written paperwork and repayment schedule then no one should have a problem with it yes? And this "loan" how would you calculate the interest? Finding the best avg rate for the type in the area? Your help is much appreciated and thank you so much already :)

Expert:  R. Klein, EA replied 1 year ago.
Your loan needs to have the federal AFR (Applicable Federal Rate)

This minimum interest rate is published monthly on the IRS website and is part of a Revenue Ruling

For short-term loans, the current minimum rate is around 0.26%

For medium Term loans it is around 1.1%

If you have a loan interest around 1.5% or more you will be fine.
Pretty reasonable rate!
Customer: replied 1 year ago.

Dear Randall,


 


Could you please provide me with a detailed checklist of setting up such a loan or what it would need (supporting documents included). So that I could have a professional setup but also be able to verify if they had setup properly without missing key factors to watch out for? I plan on rating your service as excellent and will bookmark you for future questions. Thank you my friend and have a wonderful rest of your day!

Expert:  R. Klein, EA replied 1 year ago.
I do not know all the legal requirements that are required for a valid and legal loans. Specific legal requirements may vary by state.

The basics are that you need to have valid parties and terms for repayment with interest.

I would recommend asking a legal professional as to what is required for a valid loan. I apologize that I do not have that particular expertise.




R. Klein, EA, Enrolled Agent
Category: Tax
Satisfied Customers: 2926
Experience: Over 20 Years experience
R. Klein, EA and 2 other Tax Specialists are ready to help you

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R. Klein, EA
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