taxes, s-corporationI’m considering whether it would be beneficial for my S-Corp to buy my car from me (at fair market value). The question that then arises is, “Who is responsible for vehicle maintenance?” Since, my startup is basically my second job right now, would it be reasonable for me to conclude that my company could pay for half the maintenance costs? Perhaps it should only purchase half of the vehicle. Thoughts?
Your question is more complicated then you think. There are a fair number of questions to be answered in order to prevent potential disallowance of expenses of the vehicle by the IRS and problems for you. The Government is very leery of related party transactions. If found, they are subjected to close scrutiny.
1) Why are you selling your car to your company? There should be a business reason, such as a majority of your use is for that business. If not greater than 50%, depreciation is limited as well as other expenses. Also, if the vehicle is owned by the corporation, you should be charged (assigned) the full rental value as income to you for personal use. Since your work for your corporation is a second job, you probably won’t meet the 50% test.
2) If you don’t meet the 50% test, is there any fraud element (shifting personal expenses to the business) to the sale? With less than 50% business use, and especially if you fail to report the fair rental income, you need a compelling reason for the sale (and the omission of income).
3) How was the FMV price derived? Did you get a 3rd party appraisal? The Government is interested for at least 2 reasons. First, that is a “tax free” way of taking money from your corporation. Any amount in excess of “their” FMV would be treated as taxable dividends to you. And second, did you report any gain on the sale to the corporation, as most personal sales are not. Also, there are rules that effect your adjusted cost of vehicle in the sale and thus the amount of any gain.
You have proposed the possibility of your corporation buying half your car. Would your corporation buy a half interest in a non-related person’s vehicle? You need a business reason for the sale of the whole car. I think you would need a better reason for selling a half interest. Note related party sales are problematic.
It would not be illegal to sell your car to the business, but the business may not be able to deduct any expenses related to it. Plus as noted, there are potential income issues to you.
Now, to answer your question, the business would be responsible for the vehicle’s maintenance since it owns it. But, you have to ask whether, under your circumstances, it is really worth it? That is, if you plan on following all the requirements.
I think you should consider having the business reimburse you for the company’s business use or “your” vehicle based on either proportional actual costs (all of them, including insurance) or the business mileage rate. If you want to be reimbursed, the company “needs” a written policy stating the conditions for reimbursement. Two reasons for written, one it is typical and expected for company to have a written policy of the terms for reimbursement, and two, your reimbursement might be treated as a dividend to you (related party!!), if you don’t.
You might notice my answer is focused on the rules and “if” you are examined. Many choose to ignore the rules and gamble that they won’t get caught and they don’t. Just don’t expect a paid tax preparer to go along with all of ignored rules. If the preparer is caught not following the rules he/she may suffer severe penalties including jail time.
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