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Lev
Lev, Tax Advisor
Category: Tax
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Experience:  Taxes, Immigration, Labor Relations
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Should an owner of an S-Corp (husband of husband/wife ownership)

Customer Question

Should an owner of an S-Corp (husband of husband/wife ownership) lease his personal car to the S-Corp? I have a new client who has been leasing his personal jeep to the S-Corp for $650/mo. Isn't the business lease expense offset with income on his personal return? (Granted the Self employment taxes are reduced and the actual cost of auto expenses are deductible).

What will be the best way to to handle this on his 2013 return? For his taxes, is he better off doing the standard mileage for business miles driven. But he doesn't have detailed records of where he's driven this year? But he can probably do a monthly estimate of how much he has driven. Can we go back and change the lease payments for this year into reimbursements at the standard mileage?

How should the jeep be depreciated? It's used more than 50% for business.

Any other things to consider?
Submitted: 1 year ago.
Category: Tax
Expert:  Lev replied 1 year ago.

Lev :

Hi and welcome to our site!
Lease the personal car to the S-Corporation in general would not provide any tax saving.
Allowable transportation expenses may be deducted against business income.
The best way would be to set an accountable reimbursement plan and have S-corporation to reimburse employees their business related transportation expenses.
In most situations using the standard mileage for business miles driven is more simple and and more advantageous way to claim deductions. However if the number of business miles is relatively low - actual car expenses might be more beneficial. But to be precised - we need to try both ways and compare.

Customer :

Lev,

Lev :

If the car is not 100% business use - and it is used for business and personal purposes - the record for business use is required. In case of audit - there is a risk that the auditor would not accept monthly estimate - and as a result - deductions might be disallowed.
Depreciation deduction is only allowed if actual expenses are deducted. Depreciation and other car expenses are prorated according to business use.

Customer :

Lev, Thanks for the reply. So is the best course of action for 2013 to document as best as possible the business miles for this year and use the YTD lease payments as reimbursements at the standard mileage rate (of course the YTD lease pymts would have to be reconciled to the standard mileage reimbursements).

Lev :

Regardless of how transportation expenses are deducted - such expenses must be documented. Please be aware that you do not need to attach any supporting documents to your tax return. Instead - all supporting documents must be kept as long as the IRS could audit the tax return.
In case of the audit - the auditor will ask for documents to support all deductions.
Please be aware that S-corporation and shareholders are separate entities even shareholders are also employees of S-corporation.
Because business activities are performed by S-corporation - generally - business expenses are deducted on S-corporation tax return. Because the car is owned by the employee - S-corporation reimburse business related expenses to that employee. If reimbursement is provided under accountable reimbursement plan - none of reimbursed amount are reported as wages to employees.

Lev :

In order to qualify as an accountable plan, your reimbursement or allowance arrangement must require that your employees meet all three of the following rules:

1. There must be a business connection to the expenditure. This means that the expense must be a deductible business expense incurred in connection with services performed as an employee. If not reimbursed by the employer, the expense would be deductible by the employee on his/her 1040 income tax return.

2. There must be "adequate" accounting by the recipient within a reasonable period of time. This means that your employees must verify the date, time, place, amount and the business purpose of the expenses. Receipts are required unless the reimbursement is made under a per Diem Plan.
3. Excess reimbursements or advances must be returned within a reasonable period of time. Reasonable depends upon facts and circumstances.
That is up to you - either to reimburse based on the mileage or for actual expenses only.

Customer :

And if we leave it as a lease from the owner to the S-Corp, how would the income be shown on the owner's 1040? Should the S-Corp give the owner a 1099 for the lease pymts? If so, would the income be reported on a sch C of the owners 1040? It sounds like leaving it as a lease may be the best option, since the documentation will be difficult. In addition, if we leave it as a lease, the owner doesn't have to worry about tracking and documenting the business miles. If it remains as a lease, how should we handle any personal miles driven?

Lev :

If the S-corporation provide payments to employee for use his own car - and such payments are NOT made under accountable reimbursement plan as outlined above - such payments are generally treated as wages and reported on W2.
In this case - an employee may deduct his/her transportation expenses on form 2106. But regardless - he would be required to keep supporting documents including a daily log for miles driven for business purposes. However in this case - all supporting documents will be kept by individuals - not by S-corporation.

Lev :

If you are an employee - you should use Form 2106 to figure your deduction for employee business expenses and attach it to your tax return (form 1040). Your deductible expenses are then taken on Form 1040, Schedule A, as a miscellaneous itemized deduction subject to the 2% of adjusted gross income floor.
This way generally is less beneficial because deduction will not affect employment taxes and is has a floor limit 2% of AGI.
In calculating deduction (or reimbursements) - either of methods could be used - deduct actual expenses (including depreciation of the vehicle) or standard mileage method. The standard mileage method is more common because requires less paperwork and no need to keep all receipts. Beginning on Jan. 1, 2013, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) is 56.5 cents per mile for business miles driven.

Customer :

So I guess in reality, for this year we should leave the lease as is and put it on the W-2. Another option would be to run it both ways, as a lease and as the reimbursement for estimated miles and see which one has the more favorable results.

Lev :

If S-corporation produced a profit - the best way would be to set an accountable reimbursement plan - and reimburse to employees according to their business expense reports.
Advantages of such way include following:
- expenses are deducted on S-corporation tax return - thus net profit is reduced.
- reimbursements are not reported as taxable income or employees
- no need to deduct anything on individual tax returns
- no limit on deductions
- either standard mileage or actual expenses may be deducted - that what you need to compare regardless how expenses are deducted.

Customer :

The S-Corp does produce a profit. Is it OK to change to reimbursements if the lease has been done in prior years? I need to leave for a while. How can I continue this discussion later?

Lev :

An accountable reimbursement plan may be set at any time.
That would not be a change - but starting of an accountable reimbursement plan.
If transportation expenses are paid to employees in any other way - including so-called lease payments - such payments are treated as a compensation for services provided by employees.
You may come back to this page later any time
Here is the address - http://www.justanswer.com/tax/8180h-owner-s-corp-husband-husband-wife-ownership.html
I might be not immediately available - but surely will reply.

Expert:  Lev replied 1 year ago.
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Expert:  Lev replied 1 year ago.
Just in case you were not able to use the chat - I am switching to Q&A mode and posting the answer below.
Please feel free to communicate if you need any clarification or have other tax related issues.

An accountable reimbursement plan may be set at any time.
That would not be a change - but starting of an accountable reimbursement plan.
If transportation expenses are paid to employees in any other way - including so-called lease payments - such payments are treated as a compensation for services provided by employees.
You may come back to this page later any time
Here is the address - http://www.justanswer.com/tax/8180h-owner-s-corp-husband-husband-wife-ownership.html
I might be not immediately available - but surely will reply.

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