If you operate your business as a corporation but own the business car personally, you have no vehicle deduction possibility without corporate reimbursement, because the Tax Cuts and Jobs Act does not allow employee business expenses for years 2018 through 2025.
Taxpayers Who Did This
The Ralph M. Parsons Company reimbursed Milton Lewis $14,007 to cover 60 percent of the depreciation and maintenance expenses on the home he used for business entertainment. (Home entertainment no longer qualifies for the home-office deduction, but this case does illustrate the depreciation reimbursement.)
In IRS Private Letter Ruling 6406174570A, the IRS ruled that a college could reimburse a professor for his home-office expenses, including depreciation.
Overview of the Rules
In technical terms, your corporation reimburses you under the accountable-plan rules. Under these rules, you, the owner-employee, must:
- incur these expenses in the performance of your duties for the corporation, and
- substantiate the expenses to the corporation in accordance with any specific conditions imposed by the Internal Revenue Code.
For example, if your corporation reimburses travel, business meals, or automobile, computer, or airplane expenses, then you (the employee) must submit the documents that support these deductions in accordance with the rules for the deductions.
Failure Is Not an Option
If you, the owner-employee, fail to submit adequate proof, your corporation must include the expense reimbursements in your W-2. Incorrect treatment can cause payroll tax penalties, such as the attention-getting 100 percent trust fund penalty.
With proper proof, your corporation gets the tax deduction for what it reimburses you. You, the owner-employer who receives the reimbursement, have no taxable income.
The reason you have no taxable income is that the reimbursement is from an accountable plan (think expense report); therefore, the reimbursement is:
- excluded from your gross income,
- not reported as wages on your Form W-2, and
- exempt from withholding and payment of employment taxes such as FICA and FUTA (federal unemployment).
You want the result that you see in the three bullets above.
If you think that putting an accountable plan in place would benefit your business, please do not hesitate to reach out to your team at Luster Tax Consulting to work through this with you. Please use the following link to book your complimentary strategy call with your team at Luster Tax Consulting.