Hello,
I purchased (financed) a vehicle privately (due to receiving better terms, etc.) for my Multi-Member LLC business. This vehicle is used to 100% for the business (by myself as the main active member in the Multi-Member LLC). The business is also the one paying for this vehicle loan (and all related costs; insurance, registration, etc). What deductions can I claim from a business side and are there any others I would need to claim personally (if I can't claim any business expenses)?
Thank you!
Depends on what form the business is filing ... a 1065 or an 1120-S.
And either way if this is the first return for the business it may be wise to get local professional assistance to get the books set up correctly and the first return filed properly ... get educated and then try the return yourself next year.
If you own the vehicle, then I believe that the best—and possibly only—option, is for the business to reimburse you under an accountable plan. An accountable plan means that the business reimburses you for legitimate business use of the vehicle that you prove to the business with receipts and other records. The business can either reimburse your exact expenses or it can reimburse you using the standard mileage rate. To reimburse under the standard mileage rate, you would keep a list of business trips with the mileage and provide this to the business. With the exact expense method, you would need a list of business trips and business mileage, and you would also need receipts for all the vehicle expenses, and proof of the total annual vehicle vehicle mileage. You would be reimbursed for a percentage of your total actual expense equal to the percentage of total annual vehicle miles that were for the business. Allowable expenses include fuel, repairs and maintenance, insurance, depreciation(for wear and tear), and interest on the vehicle loan but not the principal payments of your vehicle loan. (That’s what depreciation is for.)
Your vehicle use records must be gathered in a timely manner, which means close enough to the events in question that your memory and records are likely to be reliable. You might choose to get reimbursed monthly for example. You could get advance allowances for the vehicle expenses, but for the plan to be considered an accountable plan, you must eventually reconcile the advance payments with your actual expenses and re-pay any amount that was in excess of your actual expenses.
if you use an accountable plan to be reimbursed for vehicle expenses, then the expenses are a deductible expense for the business, and they are not taxable income to you, the vehicle owner. This way, the vehicle expenses are shared equally by all the members of the LLC, which is the correct way to run your business assuming the vehicle really is used 100% for legitimate business activities. Unless this is a distinctive and unique vehicle, like an ice cream truck or a panel van that has been built out with shelves for equipment and parts stock, chances are you will use the vehicle for at least some personal purposes, it’s almost unavoidable. An accountable plan with proper mileage records ensures that the other business owners are not subsidizing your personal use, even if it is only occasional.
see publication 463 for information about vehicle expenses and accountable reimbursement plans.
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?
Addendum*
3. In the event that question #2 is not advisable or allowed, would it be possible for me to Lease the vehicle to the business? Are there any restrictions? Would you recommend this under any of the circumstances I have set forth?
Thank you very much for your continued assistance!
@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.
@CVegas wrote:
Addendum*
3. In the event that question #2 is not advisable or allowed, would it be possible for me to Lease the vehicle to the business? Are there any restrictions? Would you recommend this under any of the circumstances I have set forth?
Thank you very much for your continued assistance!
Again, you have reached beyond my expertise. I can only comment that if you leased the vehicle to the business, you must report the lease income as personal taxable income. It's not clear how you would come out ahead or even equal, in that situation. And if you arrange for the partnership to pay more than the fair market value for a comparable lease, your partners could again accuse you of taking more than your share out of the company.
Hi @Opus 17 Opus 17,
thank you very much for your in-depth, detailed and informative response!
I believe some additional info may help provide the best answers;
1. The vehicle is truly, honestly, used only 100% for the business. It’s a work truck and I have my own vehicles at home that I use for my personal use. The truck even has a tracker in it that stores every single route taken that can prove it’s only being used for business use.
2. the partnership is a multi member LLC for a small family owned business. It is only myself and one other family member and I am the only active partner. The other partner is passive anyways. But on a side note, the other partner also has access to review the location of the truck live as well as view the route history.
Given the additional information, do you think this would make the situation more palatable?
Thanks again for everything!