What happens if the car you are using for business is not title to your business and it is your personal car? In this blog we are going to discuss the situation in which your business is a corporation or an LLC that is treated for IRS purposes as an S Corporation or as a C Corporation.
If you are not sure how your LLC or your business is treated for tax purposes, check what tax form the business files with the IRS. In case that it is Form 1120S, your business is an S Corporation. If it is Form 1120, your business is a C Corporation.
Personal Car Used For Business
In this situation when you use your personal car for business, are you allowed to deduct the vehicle expenses? Business deductions like:
- gas, repairs maintenance, insurance, or even the cost of the vehicle through depreciation, or the interest you pay on the car loan can be very useful in reducing your tax.
And another question that arises is: from what bank account or credit card account do you pay these expenses? Do you use the business accounts or the personal accounts? Let’s see what happens in this situation:
- First, because the car is not under the business name, the car is not a business asset. It is a personal asset. So, you should pay all the expenses from your personal accounts.
- Second, how can you deduct the car expenses, since even though this is a personal asset, you are using it for business purposes?
Well, in this situation the business will have to reimburse you, as an owner-employee of your business, for the business vehicle usage. The business can claim an expense equal to the number of miles you drove for business for that period multiplied by the IRS mileage rate applicable for that time frame. This means two things:
First, that you will need to have a mileage log and track your miles. We did a separate blog regarding what information a mileage log should have.
And second, your business should have in place an arrangement called an employer reimbursement accountable plan.
Employer Reimbursement Accountable Plan
The employer reimbursement accountable plan will allow you to submit a mileage reimbursement request to your own Corporation or LLC. Having an employer reimbursement accountable plan is very important. Because if you do not have such a plan, the IRS can treat any mileage reimbursements as wage income to you. In this case, you will have to pay unnecessary payroll taxes or you can get into other complications.
Now, an employer reimbursement accountable plan is an arrangement that needs to respect three rules:
First, you must have paid or incurred deductible expenses while performing services as an employee of your employer, in our case your own company.
Since we said that your business is treated as an S Corporation or a C Corporation, you are both an owner and an employee of your own business. As a sideline, you should always pay yourself a reasonable salary for the work that you do for your corporation.
And since you are using the vehicle for business purposes, any mileage reimbursement for your business trips should satisfy this first condition.
Second, you must return any excess reimbursement or allowance within a reasonable period of time.
And third, you must adequately account to your employer, so to your own company, for these expenses within a reasonable period of time. This is where the mileage log comes into play. You should also keep documentation regarding the cost of the car and any improvements and the date you started using it for business.
Reasonable Period of Time
Now let’s see what the IRS means to be a reasonable period of time.
The IRS says that a reasonable period of time depends on the facts and circumstances of your situation. But since this is a very murky definition, the IRS came up with some time frames that the IRS will treat as taking place within a reasonable period of time. Let’s see what these are:
- You receive an advance within 30 days of the time you have an expense.
- You adequately account for your expenses within 60 days after they were paid or incurred.
- You return any excess reimbursement within 120 days after the expense was paid or incurred.
- You are given a periodic statement (at least quarterly) that asks you to either return or adequately account for outstanding advances and you comply within 120 days of the statement.
If you do not fall under these timelines doesn’t mean that you don’t have an accountable plan. It just means that the IRS will evaluate your plan based on your facts and circumstances. But of course, the safest way is to fall within these timelines.
Conclusion
For more information on the employer reimbursement accountable plan see Publication 463.
One more thing I want to mention before wrapping up this blog: this situation where you are using your personal vehicle for business, might not be an ideal situation. That’s because a bigger deduction might result from using the actual car expenses instead of the mileage reimbursement. Whenever possible you should have the vehicle purchased under the business name.
Tax regulations can be complicated. That is why, it is very important when you have a business to seek professional advice.
If you are in need of a good CPA firm contact us!
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This material is for informational purposes only. It does not constitute tax, legal or accounting advice.