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.
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.