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Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22648
Experience:  Taxes, Immigration, Labor Relations
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I own a small business (LLC/single owner S-corp) and would

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I own a small business (LLC/single owner S-corp) and would like to buy a new car through the business. I would like to trade in a personal car to purchase the new car. Questions: Is the money received from the trade in counted as personal income? If yes, then do I pay personal taxes on it? If yes, is there a way to make it business income, instead? Also, because I paid for the car through the business, is the price of the entire car deductible as an expense?
Submitted: 9 months ago.
Category: Tax
Expert:  Lev replied 9 months ago.

Lev :

Hi and welcome to our site!
The trade is treated as if you are selling your personal car for agreed amount.
Generally - if that personal car was not used for business and you are selling it for less than it was purchased - no need to report the disposition of your car on your tax return - and there is no taxable income on the disposition.

Customer:

Ok, great

Customer:

So what part of the new car is deductible?

Customer:

just the balance of the price after the trade-in?

Lev :

For the new car - when it will be titled for the S-corporation - it is assumed a business asset - and if it is used 100% for business purposes - the purchase price is deductible, However because that is a capital asset - deductions are made via depreciation over 5 years.

Customer:

ok, so if the car is 20k, then i can't just take 20k deduction the first year. it has to be over the next five years?

Lev :

We need to view that trade as a sequence of transactions -
- you sell your old cat
- proceeds are contributed to S-corporation and added to your capital account
- S-corporation uses that contribution and additional funds to purchase a new car
- the full purchase price will be the basis of that new car.

Customer:

got it, and then can you explain "deductions are made via depreciation over 5 years?"

Lev :

To deduct depreciation - your S-corporation must select actual transportation expenses - and may not use standard mileage rate.


If you use actual car expenses to figure your deduction for a car you own and use in your business, you can claim a depreciation deduction. This means you can deduct a certain amount each year as a recovery of your cost or other basis in your car.
Generally depreciation deduction is based on when the car is placed in service - and the maximum depreciation in the first year including section 179 and bonus depreciation is $11,160 for 2013. See here - http://www.irs.gov/irb/2013-12_IRB/ar07.html
That is based on 100% business use.

Customer:

ok, last question. If I buy the new car but my wife uses it 80% of the time, do I just do the same math but can only deduct 20% for business?

Lev :

The issue is that is that will be your personal car - and it will be owned by S-corporation - for which you are an employee - the value of personal use will be treated as fringe benefits and should be reported as wages.
Keep in mind that you and S-corporation are separate entities.
Thus, in case the car will be used for personal purposes it might be better to tile it to yourself - not S-corporation, but S-corporation could reimburse you for business use according to the accountable reimbursement plan.

Customer:

ok Thanks!

Expert:  Lev replied 9 months ago.
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Expert:  Lev replied 9 months ago.

Please be aware that generally, you cannot deduct personal, living, or family expenses. However, if you have an expense for something that is used partly for business and partly for personal purposes, divide the total cost between the business and personal parts. You can deduct the business part.
The statement above is based on the federal law - see here -http://www.law.cornell.edu/uscode/text/26/262
a) General rule
Except as otherwise expressly provided in this chapter, no deduction shall be allowed for personal, living, or family expenses.

So - the best would be NOT to mix personal and business expenses.

But when they may not be divided easily - you need to keep a good record of your business use.

Be sure to ask if you need any help.

Customer: replied 9 months ago.

Thanks for your answer.


 


One clarification, though. When you said "title to yourself", does that mean I am also paying for the car with personal money? Is there a way to have it titled under my name but still have the business pay for it?

Expert:  Lev replied 9 months ago.
"the business pay" - means the money are taken from S-corporation.
That doesn't mean - the money are deductible or immediately deductive by S-corporation.
Please be aware that because you own shares of S-corporation - funds in the S-corporation are YOUR funds.
If S-corporation pays for YOUR car - that is treated as funds are distributed to you - and yes - that does mean - you are paying for your personal car with your personal money.
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22648
Experience: Taxes, Immigration, Labor Relations
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