Expense Business Vehicle

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Good Morning!

I have a profitable S-Corp (employee of 1, yours truly).

What's the most efficient way to take advantage of this situation in regards to vehicle expense?

I have previously:

  • purchased an SUV for 61k in tax year 2014 and started depreciation via Section 179 (100% business use)

    • Cost basis is 18k
    • there is a little over $2k+ left to depreciate in tax year 2017
    • The outstanding loan for the car is $30k and based on limited research it's worth just over $40k


So that previously worked out really well. But now what?

My understanding is that:

  • Based on my cost basis of $18k, if I sell the vehicle for $40k, I'll be taxed on the 22k difference?


Friends have shared their bro science with me of:

  1. Buy a new car (I can't imagine buying a new car every 3-4 years is the most cost effective thing to do here...)
  2. Lease the car to yourself

    • I can't quite wrap my head around this one. Is the reason behind the madness here to buy a new vehicle for the business...a) depreciate it (for the business) b) lease it to myself (me the person) c) expense the leasing cost on my personal taxes?



Appreciate any and all advice.

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How do you only have a cost basis of $18K?

(Without getting in to whether this is actually 100% business use) I assume the "lease" you are describing would mean that you would lease it from the S Corp to yourself, but continue to use it for business, then claim an unreimbursed business expense on your Schedule E for the lease cost? There would be no tax effect to that. S Corp income would go up by the same amount as the unreimbursed expense you deduct.

stanolshefski said:   How do you only have a cost basis of $18K?
  

61k - 25k (179 depreciation) = 36k/.5 (bonus depreciation) = 18k cost basis.

vranaco said:   (Without getting in to whether this is actually 100% business use) I assume the "lease" you are describing would mean that you would lease it from the S Corp to yourself, but continue to use it for business, then claim an unreimbursed business expense on your Schedule E for the lease cost? There would be no tax effect to that. S Corp income would go up by the same amount as the unreimbursed expense you deduct.
  
Yes to 100% business use.

I figured that would be the case. Thanks for your input on that bullet.

When you dispose of an asset such as this, is there any record of how you disposed of it?
Is there any way for the IRS to know that you junked it because the engine blew or you sold it to someone for $30k cash?

I'm not advocating being dishonest on your tax return, I'm just curious.

meade18 said:   When you dispose of an asset such as this, is there any record of how you disposed of it?
Is there any way for the IRS to know that you junked it because the engine blew or you sold it to someone for $30k cash?

I'm not advocating being dishonest on your tax return, I'm just curious.


Yes theres records for sure on auto sales.     Pretty long paper trail around vehicles.  
Title transfer.  DMV records.   Ongoing service records.     Emissions tests, inspections, etc.

edit:  I guess you're asking if the IRS gets a notice?  No.   But it won't be hard for them to find information.   If they suspect anything.   

As Jerosen said. I could claim to have sold it for way below 40k but it wouldn't hold up in an Audit.

So would rather not do that

"What's the most efficient way to take advantage of this situation in regards to vehicle expense?"
"I can't imagine buying a new car every 3-4 years is the most cost effective thing to do here"

I'm curious as to what exactly you want to do.  Not spend money that you don't need to?  Get a nice shiny SUV for as low cost as you can for "business use"?  Or something else?  Do you need to get rid of the current SUV (which may include having put a ton of miles on it and so now maintenance costs are starting to pile up)?

Each each scenario has different techniques.  

You state "Based on my cost basis of $18k, if I sell the vehicle for $40k, I'll be taxed on the 22k difference?".  That is a current understanding, as the S corp is a pass through entity and you took section 179 on the asset (so you will most likely be taxed at the depreciation recapture rates).  However, the flip side of the transaction is that the S corp would be left with a net $10k of cash (40k less 30k), due to the use of accelerated depreciation and previously taking the depreciation expense.

Merez said:   I'm curious as to what exactly you want to do...  Get a nice shiny SUV for as low cost as you can for "business use"? 
 

  

I can't speak for the OP, but generally speaking, that's the goal in these situations.

Cooz said:   As Jerosen said. I could claim to have sold it for way below 40k but it wouldn't hold up in an Audit.

So would rather not do that

  They have no idea of the condition of the car so can easily fudge it some. If audited say it needed......and that is why it was only worth $X.

Merez said:   "What's the most efficient way to take advantage of this situation in regards to vehicle expense?"
"I can't imagine buying a new car every 3-4 years is the most cost effective thing to do here"

I'm curious as to what exactly you want to do.  Not spend money that you don't need to?  Get a nice shiny SUV for as low cost as you can for "business use"?  Or something else?  Do you need to get rid of the current SUV (which may include having put a ton of miles on it and so now maintenance costs are starting to pile up)?

Each each scenario has different techniques.  

You state "Based on my cost basis of $18k, if I sell the vehicle for $40k, I'll be taxed on the 22k difference?".  That is a current understanding, as the S corp is a pass through entity and you took section 179 on the asset (so you will most likely be taxed at the depreciation recapture rates).  However, the flip side of the transaction is that the S corp would be left with a net $10k of cash (40k less 30k), due to the use of accelerated depreciation and previously taking the depreciation expense.

  

I'm leaning towards not spending money that I do not need to.

Also, is the recapture rate a flat rate, or is it counted as ordinary income?

Thanks for your insight so far!

bc3000 said:   
Cooz said:   As Jerosen said. I could claim to have sold it for way below 40k but it wouldn't hold up in an Audit.

So would rather not do that

  They have no idea of the condition of the car so can easily fudge it some. If audited say it needed......and that is why it was only worth $X.

  Don't you have to report on the title transfer how much you bought the car for?

Cooz said:   
Merez said:   "What's the most efficient way to take advantage of this situation in regards to vehicle expense?"
"I can't imagine buying a new car every 3-4 years is the most cost effective thing to do here"

I'm curious as to what exactly you want to do.  Not spend money that you don't need to?  Get a nice shiny SUV for as low cost as you can for "business use"?  Or something else?  Do you need to get rid of the current SUV (which may include having put a ton of miles on it and so now maintenance costs are starting to pile up)?

Each each scenario has different techniques.  

You state "Based on my cost basis of $18k, if I sell the vehicle for $40k, I'll be taxed on the 22k difference?".  That is a current understanding, as the S corp is a pass through entity and you took section 179 on the asset (so you will most likely be taxed at the depreciation recapture rates).  However, the flip side of the transaction is that the S corp would be left with a net $10k of cash (40k less 30k), due to the use of accelerated depreciation and previously taking the depreciation expense.

  

I'm leaning towards not spending money that I do not need to.

Also, is the recapture rate a flat rate, or is it counted as ordinary income?

Thanks for your insight so far!

  Generally, yes, depreciation recapture is treated as ordinary income. You could wait until you're outside the recovery period to sell in order to avoid this.

bc3000 said:   
Cooz said:   As Jerosen said. I could claim to have sold it for way below 40k but it wouldn't hold up in an Audit.

So would rather not do that

  They have no idea of the condition of the car so can easily fudge it some. If audited say it needed......and that is why it was only worth $X.

  
So you're going to forge the sales documentation as well?  That sounds like an excellent idea.  Why not move from owing back taxes and maybe a fine to felony tax evasion.

cestmoi123 said:   
bc3000 said:   
Cooz said:   As Jerosen said. I could claim to have sold it for way below 40k but it wouldn't hold up in an Audit.

So would rather not do that

  They have no idea of the condition of the car so can easily fudge it some. If audited say it needed......and that is why it was only worth $X.

  
So you're going to forge the sales documentation as well?  That sounds like an excellent idea.  Why not move from owing back taxes and maybe a fine to felony tax evasion.

  

Hi! Though I appreciate the conversation around the topic of how much to declare the sale of the current vehicle, lets move forward with the assumption that I will declare the actual sales price.

 

marginoferror said:   
Cooz said:   
Merez said:   "What's the most efficient way to take advantage of this situation in regards to vehicle expense?"
"I can't imagine buying a new car every 3-4 years is the most cost effective thing to do here"

I'm curious as to what exactly you want to do.  Not spend money that you don't need to?  Get a nice shiny SUV for as low cost as you can for "business use"?  Or something else?  Do you need to get rid of the current SUV (which may include having put a ton of miles on it and so now maintenance costs are starting to pile up)?

Each each scenario has different techniques.  

You state "Based on my cost basis of $18k, if I sell the vehicle for $40k, I'll be taxed on the 22k difference?".  That is a current understanding, as the S corp is a pass through entity and you took section 179 on the asset (so you will most likely be taxed at the depreciation recapture rates).  However, the flip side of the transaction is that the S corp would be left with a net $10k of cash (40k less 30k), due to the use of accelerated depreciation and previously taking the depreciation expense.

  

I'm leaning towards not spending money that I do not need to.

Also, is the recapture rate a flat rate, or is it counted as ordinary income?

Thanks for your insight so far!

  Generally, yes, depreciation recapture is treated as ordinary income. You could wait until you're outside the recovery period to sell in order to avoid this.

  

I did not know that! So if I'm outside of the recovery period, what would I pay? Capital gains on the difference between sales price and cost basis? I think the recovery period is 5 years for a vehicle.

The precise calculation I'm not sure about, but at a very high level - depreciation in excess of straight line is subject to recapture. Recaptured depreciation is ordinary income. The excess of sales price over basis+recapture is capital gain. All of this is subject to the additional usual complications: liabilities, sale-leasebacks, related party transactions, losses, etc. At the end of the day - assuming no funny business - gains are capital gains, recapture is ordinary income.

ETA: I've been assuming the corporation owns the vehicle, so if that's not the case there could be additional issues.



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