S-Corp Automobile Deduction

Who owns the vehicle matters!

You want your S-Corporation (S-Corp) to have a nice clean set of books, and the cleaner they are, the better.  Corporate payments of personal expenses either dirty up the accounting or can create a strong impression of impropriety.  The IRS is attracted to things that look suspect, which is an even better reason for you to make sure your S-Corp has a clean set of books.  So how does one go about deducting the expenses of a vehicle that is used by a S-Corp.  Well, the answer depends largely on who the vehicle is titled to.

Vehicle Titled In Corporation’s Name.  Corporations, S-Corps, and Partnerships may only claim actual expenses for vehicles.  Thus, your S-Corp may claim depreciation, fuel expenses, oil expenses, repairs, insurance, and so forth.  But what about mileage?  When the car is owned in the corporation’s name, it is not allowed to deduct mileage, just the actual expenses incurred for it’s use in business.

Vehicle Titled Personally.  To deduct the expenses of a vehicle that is owed personally by the business owner, the S-Corp can reimburse the employee expenses under an accountable plan or a non-accountable plan.  The expenses are deductible under either methodology, but the rules are different.

Accountable Plan
When an accountable plan is used, the business only reimburses expenses that are substantiated (proved) by receipts and other documentation.  The reimbursements are not taxable income to the business owner nor are they reported on their W-2.  What the owner needs to submit to the business depends on what expenses they will be reimbursed for.  In this post about S-Corp Home Office Deductions, we provide a sample accountable plan that will give you an idea of the reimbursement language.

  • Mileage Reimbursement.  The business can reimburse at the IRS standard mileage rate.  This rate includes allowances for depreciation (i.e. wear and tear), maintenance, repairs, gas, insurance, and a host of other things.  The proof the business owner would need to provide for reimbursement would be a mileage log.  This log would need to show the date, business purpose of the trip, miles driven and should be submitted to the business on a routine and timely fashion (e.g. once a month).  One important thing to note is that the standard mileage method only applies to passenger vehicles with a gross weight of less than 6,000 pounds.
  • Actual Expense Reimbursement.  The business can also reimburse for the actual expenses the business owner incurs.  The business does not have to reimburse for every expense, for example, you could reimburse gas and insurance and not tires and oil changes.  However, for any expenses the business does reimburse, it must have adequate proof.  Adequate proof means you need to see all the receipts for the expenses that will be covered.  In addition to the expenses, the owner also needs to supply the total vehicle mileage for the year as well as the mile log.  Why?  So it can determine the number of business miles and the number of personal miles to compute the percentage of business use.  This percentage is then applied to the total amount of expenses incurred to determine how much is reimbursed to the employee.

Non-accountable plan
If a non-accountable plan is used, then the business does not need to keep or see any vehicle records.  They can reimburse any amount, from below the IRS standard rate, or above the IRS standard rate.  They can reimburse for gas and insurance but not oil changes, or anything else that it wants to pay for (that is vehicle related).  But under this method, all the reimbursements get included in the employee’s box 1 W-2 wages and are subject to income and employment tax withholding.  The non-accountable plan is less beneficial to the employee because of the inclusion of the amounts on their W2 as income.

Could you be paying more in taxes than you should?

As a business owner, there are some tax benefits to being structured as a S-Corp.  The biggest one (that almost everyone knows) is the potential to reduce/minimize their employment taxes.  But did you know that through some deliberate and diligent tax planning, you could be able to legally reduce your tax burden further?

If your business does $100K (or more) in revenue, you would be a perfect candidate for our S-Corp Tax Reduction Analysis.  This analysis (a package valued at $1097, but $345 to you for a limited time), includes the following:

  • One hour investigative session to understand your business operations and potential tax levers
  • Review of the past 3 years of filed Form 1120S tax returns to unearth potentially missed deductions or tax savings
  • Formulation of potential tax strategies that if implemented could reduce the underlying tax liability
  • Comprehensive report indicating findings, tax strategies and steps to implement
  • Complementary copy of Jared’s book How to Slash Your Taxes Legally and Ethically

Furthermore, this analysis is guaranteed by our 100% ironclad money back guarantee.  If we can’t find any tax savings that equal or exceed the cost of the analysis, we’ll refund your money, no questions asked!

To claim your analysis, simply email us via the address in the footer on this page or give our office a call at 773-239-8850.  We only have capacity to perform so many of these analysis per month so get yours NOW.  We look forward to working with you!

Home Office Tax Deduction Requirements

Home Office

If you use part of your home for business, the IRS will generally allow you to deduct certain expenses come tax time. The home office deduction is available for homeowners AND renters, and applies to all types of homes.   In order to take the deduction, there are two basic requirements that you must satisfy:

Regular and Exclusive Use
You must “regularly” use part of your home “exclusively” for conducting business.  For example, if you use an extra room to run your business, you can take a home office deduction for that extra room.  The exclusive portion of the equation usually means that you can’t use that room for other things.  Meaning, if the room is your den and you also use it for entertainment or other social activities, then the deduction will not be allowed.  Also, if the room or space isn’t used on a regular basis (i.e. you only have business meetings in that room once a quarter), the deduction will also not be allowed.

Principal Place of Your Business
In addition to the above, you must show that you use your home as your principal place of business. If you conduct business at a location outside of your home, but also use your home substantially and regularly to conduct business, you may qualify for a home office deduction. For example, if you have in-person meetings with patients, clients, or customers in your home, even though you also carry on business at another location, you can deduct your expenses for the part of your home used exclusively and regularly for business. You can deduct expenses for a separate free-standing structure, such as a studio, garage, or barn, if you use it exclusively and regularly for your business.

How to claim the deduction
Generally, deductions for a home office are based on the percentage of your home devoted to business use.   Thus, if you use whole or part of a room for conducting your business, you will generally need to figure out the percentage of your home devoted to your business activities.  However, note that there are TWO methods for you to determine the deduction:

Simplified Method
For taxable years that started on or after, January 1, 2013 (filed beginning in 2014), taxpayers have the option of using the simple method per IRS Revenue Procedure 2013-13.  The standard method (discussed next) has some calculation, allocation, and substantiation requirements that some consider complex and burdensome for small business owners. The simplified option can significantly reduce the recordkeeping burden by allowing a qualified taxpayer to multiply a prescribed rate by the allowable square footage of the office.   In most cases, the deduction is calculated by multiplying $5, the prescribed rate, by the area of your home used for a qualified business use. However, note that the area you use to figure your deduction is limited to 300 square feet.  So if your office is larger than this number, you may want to take the time to use the next method.

Regular Method
Taxpayers who use the regular method (required for tax years 2012 and prior), must determine the actual expenses associated with their home office.  These expenses may include mortgage interest, insurance, utilities, repairs, and depreciation.  Once the amount spent on each category is determined, one must then allocate them between the space used in connection with their business and the rest of the dwelling.  To do this, one will use IRS Form 8829.

Where to deduct
Where you take the deduction on your tax return depends on how you conduct your business:

  1. If you are self-employed: report the entire deduction on line 30 of Schedule C (Form 1040). Whether you need to complete and attach Form 8829 to your return depends on which method you used above to perform your calculation.
  2. If you are an employee: you must itemize deductions on Schedule A (Form 1040) to claim the deduction, generally on line 21 (unreimbursed employee business expenses).
  3. If you are a member of a partnership, multimemeber LLC or S-Corp: take a look at this post for more information on how to claim the deduction.

To learn more about the following, we suggest that you take a look at IRS Publication 587:

  • Types of expenses you can deduct.
  • How to figure the deduction (including depreciation of your home).
  • Special rules for daycare providers.
  • Tax implications of selling a home that was used partly for business.
  • Records you should keep

S-Corp Home Office Deduction

Taking the home office deduction is fairly simple when you’re a self-employed individual and file Schedule C.  In those instances, you simply indicate on Form 8829 the percentage of your home that is used for work, the costs to maintain your space, and that amount will go on your Schedule C as a deduction.

If you are a member of a partnership or multimemeber LLC, then you use a similar calculation to the one listed above (see the worksheet on page 27).  However, you deduct the expenses as unreimbursed partnership expenses on Schedule E.

But what if you’re a member of a S-Corp?  Well, if you still want that home office deduction, just be prepared to do a few workarounds to get it.

25 years ago Congress enacted a law prohibiting the deduction of expenses related to the rental of a portion of one’s home to their employer.  The law was enacted in response to a Supreme Court decision [Feldman v. Commissioner].  The rental arrangement involved was viewed as an attempt to circumvent the purpose of Internal Revenue Code Section 280A, which limits deduction of expenses allocable to the business use of one’s home.

Given that office-in-the-home expenses are not allowable if the office is rented to one’s employer, an S Corporation shareholder-employee “could” deduct office-in-the-home expenses as miscellaneous itemized deductions.  But these deductions are of little or no value because of the 2% income floor imposed on Schedule A, and the add back of such deductions in computing alternative minimum taxable income.

Based on the above, the old workaround that was often used was:

  • create a rental property on Schedule E of the individuals return, and include a portion of all expenses (rent, mortgage interest, property tax, insurance, utilities, etc). You would then report an amount of income that’s equal to;
  • rent expense that you report on your S-Corp tax return. Those two amounts will offset (the rent deduction on your S-corp return and the rent income on your individual return); and you will be left with the home office deduction.

Well,  the IRS got tired of sifting through fake rental properties and instead recommends that the employee submit an expense report as part of what’s called an “accountable plan.”

So based on this guidance, here is the new way of deducting home office expenses if you are a member of a S-Corp:

  • Draft an accountable plan agreement for your company.  It will outline what expenses are eligible for reimbursement, how they will be paid, etc.  A sample plan can be found here, or you can create your own.
  • Calculate the percentage of your home that is used exclusively for business purposes.  Divide the square footage used for business by the total square footage of the home and multiply by 100.
  • Calculate the total amount of eligible reimbursable expenses (see Form 8829 above).  Multiply each amount by the percentage of business use calculated in the step above and enter the results on the expense form that you use for your accountable plan.
  • Prepare expense reports as the employee and turn them in to your company on a regular basis.  Attach receipts or other documentation to the form to substantiate them.
  • Cut the check from the business account and deposit it into your personal account. Attach a copy of the check to the form as documentation that these were paid.
  • Enter the amount of the payment into your S corporation’s records as a reimbursement for employee expenses. Post each expense claimed to the appropriate expense account so that these expenses may be deducted from the corporation’s income on its tax return.

And there you have it.  You have now created a tax-deductible business expense for the S-corp, and you don’t have to report the reimbursement as income.

Could you be paying more in taxes than you should?

As a business owner, there are some tax benefits to being structured as a S-Corp.  The biggest one (that almost everyone knows) is the potential to reduce/minimize their employment taxes.  But did you know that through some deliberate and diligent tax planning, you could be able to legally reduce your tax burden further?

If your business does $100K (or more) in revenue, you would be a perfect candidate for our S-Corp Tax Reduction Analysis.  This analysis (a package valued at $1097, but $345 to you for a limited time), includes the following:

  • One hour investigative session to understand your business operations and potential tax levers
  • Review of the past 3 years of filed Form 1120S tax returns to unearth potentially missed deductions or tax savings
  • Formulation of potential tax strategies that if implemented could reduce the underlying tax liability
  • Comprehensive report indicating findings, tax strategies and steps to implement
  • Complementary copy of Jared’s book How to Slash Your Taxes Legally and Ethically

Furthermore, this analysis is guaranteed by our 100% ironclad money back guarantee.  If we can’t find any tax savings that equal or exceed the cost of the analysis, we’ll refund your money, no questions asked!

To claim your analysis, simply email us via the address in the footer on this page or give our office a call at 773-239-8850.  We only have capacity to perform so many of these analysis per month so get yours NOW.  We look forward to working with you!

S-Corps and Taxation Considerations

An S corporation (sometimes referred to as an S Corp) is a special type of corporation created through an IRS tax election (you must first incorporate the business and then make the IRS election via Form 2553).  Many new business owners often contact us asking if this is a good form to conduct business under.  While there are advantages to operating as an S Corp, there are some things that one should consider prior to making the election.  Depending on your goals, one may find that it’s better to operate under another organizational structure.

Ownership Restrictions

Per IRS guidelines, S Corp owners (shareholders) must first meet the following criteria:

  • Limited to 100 or fewer persons/entities
  • Must be US citizens/residents (cannot be non-resident aliens)
  • Cannot be C Corporations (C Corp), other S Corps, limited liability companies (LLCs), partnerships or certain trusts
  • Any shareholder who works for the company must pay him or herself “reasonable compensation.” Basically, the shareholder must be paid fair market value, or the IRS might reclassify any additional corporate earnings as “wages”

Benefits

Many small business owners elect S Corp status for two main reasons:

  • Avoid double taxation on distributions
  • Allow corporate losses to flow through to its owners (however there are 3 loss limitations discussed later)

Other typical advantages include:

  • Limited liability protection. Owners are not typically responsible for business debts and liabilities.
  • Easy transfer of ownership. Ownership is easily transferable through the sale of stock.
  • Unlimited life. When a corporation’s owner incurs a disabling illness or dies, the corporation does not cease to exist.
  • Potential use of personal assets for business use.  Check out this post about S-Corp vehicle usage and this one for S-Corp home office usage.

Pass Through Taxation

What makes the S Corp different from C Corp is that profits and losses pass through to your personal tax return. Consequently, the business is not taxed itself, only the shareholders are taxed.  The amount which is taxed is determined by the shareholders basis (i.e. their interest in the business).  What is unique about S Corp basis is that it fluctuates depending on several things including the company’s operational performance.

Additionally, since the tax liability lies with the shareholder and not the corporation, individuals have to make sure that they receive enough money from the corporation in the form of distributions in order to satisfy their tax obligation.  Non dividend distributions aren’t taxable to the extent the shareholder has adequate basis.

Importance of Basis

It is important that a shareholder know their stock AND debt basis at all times. As such, it is imperative that it be calculated every year.  If the corporation allocates a loss or deduction to the shareholder, in order to claim it the shareholder needs to demonstrate that they have enough stock or debt basis.  For example, if a person invests $10,000 in a company (i.e. stock basis) and the company then passes through a $18,000 loss to them in a single year, only $10,000 will be deductible in that year.  The remaining $8,000 becomes “suspended” until the shareholder has adequate basis in the future.

Loss Limitations

As mentioned above, losses are limited to the extent that an owner has basis.  However, there are in fact three limitations which could cause a loss to be nondeductible at any given time.  Each limitation must be met in the following order before a shareholder is allowed to claim a flow through loss:

  • Stock and Debt Basis Limitations
  • At Risk Limitations
  • Passive Activity Limitations

Calculating Stock Basis

A good way to think of stock basis is in terms of a checking account.  Basis essentially equals deposits and earnings less any withdrawals made.  Furthermore, similar to a bank account (with no overdraft protection) basis cannot go negative – that is more cannot come out than goes in.

  • Initial basis typically starts with the money a shareholder paid for the S Corp shares, property contributed to the corporation, carryover basis if gifted stock, stepped-up basis if inherited stock or basis of C Corp stock at the time the C Corp converts to an S Corp.
  • Subsequent basis is made via adjustments which are typically recorded at the end of the corporations tax year.  First they are increased by income items, then decreased by distributions and lastly decreased by deduction and loss items.  The order is important because if basis is positive before distributions but would be negative if all deduction items were subtracted (however, again, basis cannot be negative) then the excess loss would be suspended rather than the excess distribution being taxable.

Other Important Considerations

  • S Corps must pay reasonable compensation to a shareholder-employee in return for services that the employee provides to the corporation before non-wage distributions may be made to the shareholder-employee.
  • The instructions to the Form 1120S, U.S. Income Tax Return for an S Corporation, state “Distributions and other payments by an S corporation to a corporate officer must be treated as wages to the extent the amounts are reasonable compensation for services rendered to the corporation.”
  • Under section 7436 of the Internal Revenue Code, the IRS has the authority to reclassify payments made to shareholders from non-wage distributions to wages (which are subject to employment taxes).
  • Suspended losses and deductions due to basis limitations retain their character in subsequent years. Any suspended loss or deduction items in excess of stock and/or debt basis are carried forward indefinitely until basis is increased in subsequent years or the shareholder disposes of their stock.
  • In determining current year allowable losses, current year loss and deduction items are combined with the suspended loss and deduction items carried over from the prior year, though the current year and suspended items should be separately stated on the Form 1040 Schedule E or other appropriate schedule on the return.
  • If the current year has different types of loss and deduction items, which exceed stock and/or debt basis, the allowable loss and deduction items must be allocated pro rata based on the size of the particular loss and deduction items.
  • If a shareholder sells their stock, suspended losses due to basis limitations are lost. Any gain on the sale of the stock does not increase the shareholder’s stock basis. A stock basis computation should be reviewed in the year stock is sold or disposed of.
  • A non-dividend distribution in excess of stock basis is taxed as a capital gain on the shareholder’s personal return. Stock held for longer than one year is a long-term capital gain (LTCG).
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