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I have a client that was a Sole Proprietor. He formed an LLC

I have a client that...
I have a client that was a Sole Proprietor. He formed an LLC and elected to be taxed as an S-corp on 8/1/17. He purchased a $39k vehicle in his sole proprietorship in 2015 and deducted Sec 179 and A/D through 2016 of $26k. What are his options for using the vehicle in the S-corp? I seem to think he has 3 options:
JA: The Expert will know how to help. Is there anything else the Expert should be aware of?
Customer: 1) sell the vehicle to the S-corp....2) keep the vehicle personal but continue to take depreciation and actual costs as 2106 expenses....3) Get reimbursed by the S-corp for actual mileage....thoughts?
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Answered in 7 minutes by:
10/18/2017
Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 30,331
Experience: Taxes, Immigration, Labor Relations
Verified

Selling the car to S-corportaion will not be an arm's length transaction - and as such will NOT affect calculations.
Because the client elected to deduct actual expenses in the year the car was placed in service - he may not use the standard mileage rate - and must continue to use actual expenses.

Other options are correct - he as an employee of S-corportaion is entitled to deduct actual cost for business use of his car.

Or S-corportaion may establish an accountable reimbursement plan fro business expenses including car expenses.

He may transfer the car to S-corportaion - but that might be not in his best interest because insurance cost will likely be higher and there will not be any tax benefits.

S-corportaion will continue to depreciate using the same depreciation schedule.

Questions?

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Customer reply replied 1 month ago
Sounds like best option is for him to keep it in personal name and continue to deduct depreciation and actual costs? Can those costs (including depreciation) be reimbursed by the S-corp under an accountable plan thereby avoiding Form 2106?

The best option I might suggest to have S-corporation reimbursements under an accountable reimbursement plan.

In this case reimbursements will NOT be included into W2 - so no need to deduct on his personal tax return.

But for S-corportaion that will be deductible business expenses and will reduce taxable income reported on K1.

.

To be an accountable plan, the reimbursement or allowance arrangement must include all of the following rules.

  1. Your expenses must have a business connection — that is, you must have paid or incurred deductible expenses while performing services.

  2. You must adequately account to the payer for these expenses within a reasonable period of time.

  3. You must return any excess reimbursement or allowance within a reasonable period of time.

Otherwise - these payments are added to your taxable income.

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Customer reply replied 1 month ago
To clarify, can depreciation be reimbursed by the corporation and still fall under an accountable plan?

Yes - that will be depreciation for business use property - so depreciation is allowable.
That depreciation will be a part of other actual expenses.

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Customer reply replied 1 month ago
Great, thank you! Can you point me to the appropriate code/regs to support this?

Deduction of Actual expenses are covered in IRS publication 463 - see page 16

https://www.irs.gov/pub/irs-pdf/p463.pdf

This publication specifies what are qualified expenses and require the proration for business portion for deducting purposes.

The deduction is specifically allowed by section 162

https://www.law.cornell.edu/uscode/text/26/162

(a) In general

There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business

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Customer reply replied 1 month ago
Thank you!

Regarding reimbursements - see following regulations

https://www.law.cornell.edu/cfr/text/26/1.162-17

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Lev
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