Gifting a car to a contractor vs. Sell it to them below FMV

[rwaldenjr]

I purchased a used vehicle in my LLC's name with the intent of providing transportation for one of my contractors. The contractor is currently paying all expenses and insurance on the car. And, I need to transfer title to enable the contractor to register the car in their name and remove my company from liability.

The car is used for company business as well as personal use. The car is well below the maximum threshold for "gift" taxes. (The contractor won't have to pay a gift tax.) Or, the potential sale price would be so low that the state sales tax required to transfer title would be negligible.

Can a company gift an asset? I'm trying to determine if there are greater tax advantages or disadvantages to my company if I take a loss in selling it below market rate (FMV)!?! However, I've read conflicting advice online about the tax advantages/disadvantages for a company when gifting a car vs. selling it  (at a loss - below FMV)!?! What is the recommended way to do this for a small sole member LLC?

Thanks in advance for your help!

Questions:

1. How do I avoid having to pay employee taxes on the vehicle as compensation or fringe benefits for services rendered?

2. Can I take a tax deduction for gifting a vehicle to a contractor/employee? If so, how do I do that?

3. What are the tax advantages/disadvantages of selling it below FMV? And, what is the best way to do that to avoid triggering an audit?

4. If I sell it, can I include a clause on the Bill of Sale that indicates the payment it to be held in abeyance for XYZ reasons (i.e., forgiven)?

[GeorgeM777]

A significant part of what you have posted is beyond the scope of the type of advice we can provide.  However, if you decide to sell your vehicle to your contractor, you report the sale of the vehicle on Form 4797, the Sales of Business Property form. The form features multiple sections, and each section addresses a different type of asset. Part III is the correct portion of the form if you sold a business vehicle, which is considered a property asset. This portion of Form 4797 allows you to report the sale of depreciable personal property, which is referred to as 1245 property.  When you log back into your TurboTax account, you can enter information about the sale of the your vehicle in the section Wages & Income.  Scroll down to the Sale of Business Property and answer the questions accordingly.  

Regarding the sale, you must calculate the tax adjusted basis for the vehicle during the sales process. The adjusted tax basis is the value of the vehicle after depreciation. This value is based on the original cost of purchasing the vehicle minus allowable annual depreciation. 

If the contractor were your employee, be advised that if you sell a vehicle to an employee for substantially less than market value, the difference is taxable income and must be treated as imputed income on the employee's W-2. 

[rwaldenjr]

George -

Thank-you for your detailed response regarding IRS forms and documentation for a sale. Now, what about for "gifting" a company's property asset to an individual? The car was purchased used in December 2021. So, the amount of depreciated value from the original sales price should be negligible. But, we paid more for it than FMV (Blue Book), due to its excellent condition and Covid-related price increase. (Good used lower-priced vehicles are scarce in this city, since the pandemic. And as a result, you pay a premium for them.) Can my company still depreciate the full purchase price of the asset on my 2021 taxes? If so, how do I document that and what forms do I use? And, if I can't take the full purchase price as a deduction, how can I account for the loss of value?

[ThomasM125]

You can only depreciate the vehicle based on the time it was used in the business for business purposes. Since you only held it for a few weeks, your depreciation expense would be limited. It is true that you can take special depreciation allowances in the year you purchase some vehicles, but if you retire them soon after that you have to "recapture" that depreciation which will affectively reduce that allowable depreciation deduction.

If you suffered a loss on the value of the vehicle because it went down in price when you sold it, you would have a loss on sale of a company asset that may be deductible as such on your tax return. 

[rwaldenjr]

Thomas -

Thank-you for further clarifying George's reply about tax deductions and depreciation of property assets. However, I sense that you're still assuming I'm selling the vehicle. What are the tax advantages/disadvantages and depreciation parameters around gifting the vehicle to my contractor rather than selling it? Am I able to gift a company asset? If so, would I have to gift it for:  a. the vehicle's FMV; b. the property asset value (which in this case greater than FMV, based on the original purchase price); or, c. a reduced value below FMV?

[RobertB4444]

@rwaldenjr You can gift a car to a contractor or an employee but the IRS wants in.  So be aware of that.

To start with - if your gift is more than $15,000 it's a non-starter.  Anything over that amount counts as income to your contractor and they will pay taxes on it.  The value of the gift you're giving is the fair market value at the time of transfer.

What you're doing by gifting this is transferring ownership and basis transfers.  So the value you are receiving for the vehicle is zero loss, zero gain.  There are no advantages or deductions to your company for doing this and the disadvantage is your assets drop by the value you transferred.

As long as the value of the vehicle is below 15K then you just transfer over the title and your contractor will have to take care of whatever transfer or title taxes are required in your area for a vehicle.  

Now, IF YOU TAKE SECTION 179 DEPRECIATION for the vehicle prior to gifting it to your contractor you have to recapture that depreciation in order to give the gift.  So if you take that depreciation deduction that you want because you bought the car in December then you are required to recapture that depreciation as income.

[Opus 17]

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@RobertB4444 wrote:

@rwaldenjr You can gift a car to a contractor or an employee but the IRS wants in.  So be aware of that.

To start with - if your gift is more than $15,000 it's a non-starter.  Anything over that amount counts as income to your contractor and they will pay taxes on it.  The value of the gift you're giving is the fair market value at the time of transfer.

What you're doing by gifting this is transferring ownership and basis transfers.  So the value you are receiving for the vehicle is zero loss, zero gain.  There are no advantages or deductions to your company for doing this and the disadvantage is your assets drop by the value you transferred.

As long as the value of the vehicle is below 15K then you just transfer over the title and your contractor will have to take care of whatever transfer or title taxes are required in your area for a vehicle.  

Now, IF YOU TAKE SECTION 179 DEPRECIATION for the vehicle prior to gifting it to your contractor you have to recapture that depreciation in order to give the gift.  So if you take that depreciation deduction that you want because you bought the car in December then you are required to recapture that depreciation as income.

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EVERYTHING of value that you give to a contractor in return for services is taxable income, there is no $15,000 threshold.  The consequence to the contractor is that the fair market value of the vehicle must be included in what you report on their 1099-NEC, no matter what the value is.

In addition, the value of personal use by the contractor is ALSO part of their taxable compensation, unless it was de minimis.  For example, if the vehicle is a transit van fitted out with plumbing tools and supplies, the fact that the contractor can take it home and occasionally use it for groceries or stops at the pub on the way home would be de minimis use.  You need to include the value of personal use of your business vehicle on their 2021 1099-NEC form if it is not de minimis.

There is also an argument that could be made by an auditor, that if you were not requiring mileage receipts and so on, the entire value of the use of the vehicle must be reported as taxable compensation to the contractor, and then it would be up to the contractor to claim any mileage deduction on their own return.  If you are allowing the contractor free use of the vehicle without adding the value on their taxes, and they are also claiming a mileage deduction, they are double-dipping.

The consequence to your business depends on how you listed the asset for depreciation at the beginning.  You will report the vehicle as "sold" to the contractor for it's fair market value (the same amount you include on the contractor's 1099).  This might or might not trigger a taxable recovery, based on the value, your cost, and the depreciation method used.

You may want to hire an accountant to help you avoid such complications in the future. 

[Opus 17]

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@rwaldenjr wrote:

Thomas -

Thank-you for further clarifying George's reply about tax deductions and depreciation of property assets. However, I sense that you're still assuming I'm selling the vehicle. What are the tax advantages/disadvantages and depreciation parameters around gifting the vehicle to my contractor rather than selling it? Am I able to gift a company asset? If so, would I have to gift it for:  a. the vehicle's FMV; b. the property asset value (which in this case greater than FMV, based on the original purchase price); or, c. a reduced value below FMV?

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You can't legally gift the vehicle to your contractor.  It's something given in compensation for their services performed, which means the value must be included on their 1099-NEC.  (Same with barter, which must be reported in the same way.)

It's only a gift if it is a true gift with no strings attached, is not related to your business, you would have made the same gift even without the business relationship, and there are no future expectations such as continuing to work for your company.  

[AmeliesUncle]

I just wanted to reaffirm that Opus's comments are correct.  It is NOT a "gift" (at least not for tax purposes).