01 Feb Here’s a 2014 Business Vehicle Strategy That You Probably Were Not Aware Of
Did you buy a 2014 business vehicle in your personal name? To protect your Corporation’s deductions, read this briefing.
Even though you may have purchased one or more vehicles in your name, you can still substantially reduce your income taxes with the legal utilization of IRS Code Section 179, and bonus depreciation. The tax law allows you to purchase property in your name, move the expense to the corporate books, and receive the full benefit of the related business deductions for the property.
IRC Section 179 In Action
Let’s say in July 2014, you purchased a used $25,000 SUV with a gross vehicle weight rating (GVWR) of 6,500 pounds that you used 100% for business. Under the actual expense method of the tax law, you have 2 choices for deducting this transaction:
- The depreciation schedule for this type of asset allows you to recover this cost over a 6 year period.
- You can use Section 179 to deduct the entire amount of $25,000 in the year you purchase the SUV and begin to use it in your business; you receive the entire deduction in 2014!
Please be advised that one cannot use the 179 expensing if you elect to use the IRS mileage rates.
Section 179 Expensing + Bonus Depreciation In Action
Now, let’s say the SUV you purchased in July, 2014 cost $50,000. You can legally deduct:
- $25,000 in Section 179 expensing
- $12,500 in bonus depreciation deductions, and
- $2,500 in MACRS (regular depreciation)
This results in a 1st year tax deduction of $40,000, all of which is reimbursable through your corporation.
Title to You, Expense to Your Corporation.
Sometimes its better to buy an asset in your personal name for legal reasons, better financing terms, insurance rates, or any number of other reasons. Can you still utilize IRS Section 179 to deduct the cost of the asset? The good news is YES! Have the corporation reimburse you.
When the corporation reimburses you, the expense and tax deduction move to the corporate tax return, and the tax deduction passes through to the shareholders. A corporation is allowed to reimburse an employee for all expenses allowable under IRC Codes Sections 161-199–which includes Section 179 and bonus depreciation. Here are the results:
- You as the employee do not report the reimbursement as taxable income
- The corporation gets the full tax deduction allowable
- That deduction ultimately passes through to you as the shareholder of your S Corporation
Section 179 does not require the S Corporation to obtain title to the property in order to expense it. Section 179 only requires the corporation to incur the cost for qualifying property that is predominately used in the conduct of the business. Private Letter Ruling (PLR) 200930029 endorses the reimbursement of Section 179 expenses.
Please be advised that to properly use this tax strategy your corporation needs an “accountable plan” to be documented in the corporations records, preferably in the corporate minutes.