Big Vehicle Deductions for C Corporation & Employees

Updated
Posted
January 22, 2021
Frederick W. Daily, J.D, LL. M (tax)

Some small businesses are organized as “C corporations.” This isn’t cost-effective for most, who go for the simpler ways of doing business as Sole Proprietorships, S Corporations or as Limited Liability Companies.

If your operation generates profits of six figures or more, the extra accounting, legal fees and paperwork might be worth the extra expenses of a C corporation. One nice benefit can be a “company car.” In that case, here is what you need to know, in a nutshell:

First, the rules for deducting vehicle expenses depend on whether the corporation or the employee owns the vehicle. For small business C corps, the employee and the stockholders/owners are usually one and the same. So, the question is which one holds the title to the vehicle.

  1. Corporation owned vehicles. A new BMW is a nifty perk for a corporate employee — especially if she can drive it to impress her friends off-hours. The corporation can deduct all of the BMW costs. The tax catch is that the value of the personal use portion is taxable to the employee. So, a mileage log must be kept showing the breakdown of business/personal miles driven.
  2. Employee owned vehicles. The other way to go is having the C Corporation reimburse employees for business driving of their personal vehicle. The reimbursement isn’t taxed as income to the employees, except to the extent of personal use. Again, record-keeping is vital.

Let’s do an example. Rory Calhoun is the one and only stockholder of Chromedome, Inc., and he is a full time employee. At tax time, Rory’s auto mileage log shows that he drove his personally owned Mustang Cobra 80% of the time for business and 20% for pleasure. Assume that Chromedome Inc tax-deducts and reimburses Rory $7,200. So, Rory reports 20% of the reimbursement ($1,400) as additional income. If Rory is in a mid range tax bracket, his additional federal income tax would be about $500. Considering the real costs of owning vehicles, this looks like a great deal for Rory and his corporation.

For more detail on C corporation vehicle deductions, see IRS Publication 463 (irs.gov) and my book, “Tax Savvy for Small Business” (Nolo) at Amazon.com and my website, taxattorneydaily.com.

Frederick W. Daily, J.D, LL. M (tax)
Originally Published
May 6, 2016
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