When your S-corp buys the vehicle, it should be titled in the corporation's name. The payment can come directly from the corporation's funds, and you'll want to ensure the purchase is documented properly in your financial records. This way, the vehicle is recognized as a corporate asset.
If you use your car only for business purposes, you may deduct its entire cost of ownership and operation (subject to limits discussed later). However, if you use the car for both business and personal purposes, you may deduct only the cost of its business use.
An accountable plan is used by S Corp owners to reimburse themselves for purchases and personal items that are also used by the business (aka mixed-use purchases). Home office and auto expenses are the most common expenses reimbursed through an accountable plan.
Like LLCs, eligible S corps can take the QBI deduction (Section 199A), which can amount to as much as 20% of a business's total taxable income and can be taken in addition to standard and itemized deductions.
Auto Expenses
The business portion of vehicle expenses is tax deductible for an S-Corp. If the vehicle is used both in a personal capacity and a business capacity, then only the business portion is deductible.
Some unique income tax rules apply to S corporations regarding compensation and fringe benefits paid to shareholders who own greater than 2% of the corporation. Under these S corp income tax rules, a greater than 2% shareholder is taxed as a partner in a partnership for fringe benefits received.
You use the phone for business purposes 70% of the time and for personal reasons 30% of the time. You can use an accountable plan to reimburse yourself for 70% of the cost. This means getting $70 out of your company, tax-free, to pay for your phone bill each month. Your business can then write that off as an expense.
An accountable plan allows S Corp owners to reimburse themselves from the business for business-use or mixed-use purchases made using personal funds.
To write off your S Corp mileage, your company should reimburse you for the business use of your personal car. The vehicle is registered under your name and you pay all expenses such as gas, repairs, and insurance from your personal account.
Great news if you're a business owner or self-employed and use your own vehicle for your work. You could deduct your car's expenses, and maybe even the purchase price if it's low enough, when filing your taxes, and that could boost your refund or reduce the taxes you owe.
Limitations on Vehicles
If a car is first used for personal purposes and then changed to business use in a subsequent year, section 179 cannot be used upon transfer to business use, however the vehicle will still be depreciated and it may still be eligible for bonus depreciation.
If you bank a lot of mileage for work, the standard method might result in bigger tax savings. If you drive a fairly average amount for work, however, you might save more using actual expenses.
Wondering what the benefits are of buying a car under an LLC? For business owners, it's a great way to reduce your personal liability and safeguard your privacy. Plus, you may be able to deduct most vehicle maintenance costs when filing your business income taxes.
An S Corp owner has to receive what the IRS deems a “reasonable salary” — basically, a paycheck comparable to what other employers would pay for similar services. If there's additional profit in the business, you can take those as distributions, which come with a lower tax bill.
The S corporation can pay you rent for the home office. The S corporation can pay you for the costs of a home office under an “accountable” plan for employee business expense reimbursement. Accountable Plan for S-Corporation Deductions and Reimbursements.
You may or may not have heard of the S Corp Salary 60/40 rule. The guideline encourages setting reasonable compensation between 60% and 40% of the business's net profits. The IRS does not set this guideline. It should not be relied on as the only factor for deciding S corporation reasonable compensation.
The S Corporation can either purchase the policy in your name or reimburse you for the premiums you paid.
A shareholder distribution is a way to take funds out of your business without incurring payroll taxes. For a solely owned S Corporation, this is achieved by transferring funds from your business checking account to your personal bank account.
The direct answer to whether an S Corp can pay a shareholder's mortgage is no. Personal expenses, including mortgage payments, cannot be directly paid by the corporation without significant tax implications and potential violations of IRS regulations.
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.
S Corps that lose their “S” status must typically wait five years before being able to re-elect it. As mentioned, deliberately violating one of the rules, such as transferring stock to an ineligible shareholder, is not a good thing.
Life insurance premiums are only deductible if the S corporation offers life insurance as an employee benefit.
As long as the shareholders approve, there are no restrictions on purchasing property for rental purposes. There are restrictions on the income derived from the property, though. The S Corporation is taxed as a pass-through entity and profits and losses pass through to its shareholders.