@CVegas wrote:
Thank you Opus 17! I greatly appreciate your detailed response! Just a few additional questions;
1. Would I actually need to "reimburse" myself for these expenses or can the company just pay for them directly, as they occur?
2. I understand that I can't deduct the principal from the vehicle loan (which is what you alluded to in your response) but could the business still pay for the loan of the vehicle anyways (without deducting this as an expense)? Or would this be some type of infringement/violation of a tax policy?
You are exceeding my expertise and you will want to consult a professional accountant.
1. Here's the problem. This is your personally owned vehicle. From your personal point of view, any reimbursement in excess of your actual business use is taxable income to you (which must be included in your K-1 income) and also could be seen as misappropriating funds from your other partners. Hence the need for ironclad documentation. Form the business point of view, the business can only deduct ordinary and necessary business expenses. You getting groceries or driving your kid to soccer practice is not a business expense. Could the business prove, if audited, that you only used the car for business. Could you prove to your partners, if accused, that you were not taking more than your share of the profits, by claiming business reimbursement for personal use?
The only method I personally could defend as being completely legal and ethical, which protects you and the business, is for you to pay the expenses out of pocket and then get reimbursed by the business on either a mileage rate method or the actual expense method, both of which are described in chapter 4 of publication 463. This requires you to keep separate records of business and personal use, and only get reimbursed for business use. https://www.irs.gov/pub/irs-pdf/p463.pdf
For example, if your business has an office, your mileage from home to work and back again is your commute, which is a personal expense, and not a business expense. If the business pays for your commute, that's taxable income to you. If audited, could you swear you never used the work vehicle to go to the grocery store, or pick up your kid at school when your other car had a flat tire? Could you prove it with reliable records?
The business can give you a car advance as part of an accountable plan, as long as you periodically and in a timely fashion, provide your mileage and expense records and reconcile your account, paying back any excess advance if the is one. But you and the business must follow an accountable plan.
Lastly, does your insurance company know this is a business vehicle? If really used 100% for business, they would probably charge you more for insurance.
Ultimately, I am thinking of protecting you from liability, from false accusations of wrongdoing, and protecting you and the business from audit.
There may be another way for your partnership to pay you for a personally owned vehicle used in business and I could just be scared of my own shadow. But you would need to seek a higher professional opinion from someone who is actually paid by you to stand behind their opinion.
2. I think this is covered in #1. If you use the mileage method, you get paid a flat rate per mile. That includes all costs--fuel, maintenance, repairs, insurance and depreciation. The mileage method actually results in a higher reimbursement level for many users. Or you can use the actual expense method in which the company reimburses you for allowable expenses,, which are listed in publication 463 and include depreciation and interest (as well as fuel, maintenance, repairs, and insurance) but not the principal balance of the loan. That's covered by depreciation.
For anything more, you will need to speak to a professional.
