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Get agency agreement.
How To Get The Maximum Tax Breaks For Personally-Owned Business Cars
Recently, we received a call from a doctor facing a dilemma. He had purchased a new sport utility vehicle (SUV) for practice use, but the dealership had erroneously titled the vehicle in his personal name. He called his CPA, who informed him that the practice must own the vehicle to claim any tax breaks. He looked into transferring ownership into his corporation, but discovered he would owe sales tax and other transfer fees, and face higher auto insurance premiums. What could he do?
As a general rule, the tax law requires that business car tax breaks be reserved for the owner. Fortunately, there are two exceptions allowing the doctor to avoid these unnecessary costs while allowing the practice to reap the full tax breaks, even though the ownership remains personal.
Under the first option, the corporation agrees to reimburse the doctor for personally-paid vehicle expenses under an accountable plan approved in its minutes. Under the tax law, a corporation can reimburse an employee for all business car expenses allowed under Section 162, as well as for bonus depreciation and Section 179 expensing amounts. In Private Letter Ruling 200930029, the IRS stated that the corporation does not have to obtain title to the property in order to claim these depreciation deductions, including Section 179. Rather, the corporation must simply incur the cost for the vehicle that is predominately used in the conduct of its business.
When the corporation reimburses the doctor, all the business expenses and deductions move to the corporate return, while the doctor has the money in his pocket as a non-taxable employee expense reimbursement. In addition to the corporate minutes adopting this accountable reimbursement plan, the doctor must submit an expense report to the corporation for his auto expenses incurred.
This report must include a receipt for the vehicle purchased that shows the ownership and cost of the vehicle, a statement by the doctor that the reimbursements for Section 179 and bonus depreciation will reduce the basis in the vehicle for purposes of gain or loss on a future sale, a statement that the doctor will reduce the overall Section 179 limits that apply to he and his spouse on his personal return by the amount of the Section 179 expense reimbursement, a statement that if the business use of the vehicle drops to 50% or less, he will reimburse the corporation for the required recapture of deductions, and a mileage log that proves his percentage business use of the vehicle.
We recommend a simpler approach that is equally effective. The doctor and his corporation can sign an Agency Agreement, providing that the doctor is retaining personal ownership of the vehicle to avoid the transfer costs, but that all legal rights (benefits) and costs (burdens) of ownership are assumed by the Corporation as the Principal.
Thereafter, the corporation would make all loan payments, and pay all gas, oil, insurance, repairs, maintenance, taxes, tags and other operating expenses of the SUV and would claim those deductions on its return. Likewise, when the SUV is later sold, all sales proceeds would belong to the corporation. As such, the corporation, as equitable owner, was able to claim all depreciation deductions on the SUV, including Section 179 and 50% bonus depreciation, while avoiding the unnecessary transfer costs.