An S corporation is a popular business structure for many self-employed individuals—locum tenens, CRNAs, independent contractors, or small business owners because of its tax advantages particularly for lowering self-employment taxes. However, when it comes to deducting vehicle expenses, there are rules that must be observed depending on who owns the vehicle.
Personal Vehicles Used in Business
If you use your personal vehicle for your business, the S Corporation can reimburse you for any business miles you drive. There are two ways to claim reimbursement:
Standard Mileage – To figure the vehicle reimbursement, apply the IRS standard mileage rate to every business mile driven. The IRS mileage rate covers expenses related to operating a vehicle such as depreciation, fuel, maintenance, repairs, etc. Note that parking fees and tolls can still be reimbursed separately even if you use this method.
Actual Expense – The S Corp owner may also be reimbursed based on the actual vehicle expense incurred for business trips. You may claim expenses specific to a business trip or apply the business use percentage to determine the amount of reimbursement. Remember to keep the total miles driven for the year to compute for the business percentage use of the vehicle. Note that loan interest related to personal vehicle cannot be claimed for reimbursement as the IRS deems it as personal expense.
Accountable vs Non-Accountable Plan
Regardless of your chosen method, it is important that the reimbursement be made under an accountable plan. Reimbursements under this plan are deducted as business expenses of the company and are not reported as part of the income of the owner-employee.
Reimbursements under an accountable plan mean that they meet the following IRS criteria:
- Must be business-related,
- Substantiated with records such as mileage logs, receipts, and purpose of each business trip, and;
- Any excess reimbursements must be returned within a reasonable time.
On the other hand, reimbursements that fail to meet the above criteria are under non-accountable plan and shall be reported as part of the owner-employees W2 income subject to taxes.
Vehicle Owned by the S Corporation
Expenses related to company-owned vehicles can only use the actual expense method in recording its expenses. Businesses can directly claim the vehicle’s operating expenses and depreciation, but it is still subject to the business use percentage of the vehicle.
If the S corporation fully claims the expenses even when they are not 100% in business use, the portion of expenses that are related to personal use will be taxable fringe benefits to the S Corp owner-employee.
Documenting Business Use of Vehicles
Regardless of who owns the vehicle, or the method use in determining its expenses, maintaining accurate records is important to ensure that your deductions are accepted by the IRS. Below are the best practices to help you maximize your deductions:
- Maintain a detailed mileage log. Use digital tools or apps to track business miles, dates, and purposes. Keeping a simple excel file is not enough when audited by the IRS. Read our dedicated blog for effortless mileage tracking.
- Keep records and receipts. Store and organize your receipts and records to help you support your claim or deductions.
- Separate business and personal use. Keep in mind that only business-related expenses are deductible. Running personal errands and commuting to and from work (except for home office) are considered personal expenses.
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