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To comply with certain U.S. Treasury regulations, we inform you that, unless expressly stated otherwise, any U.S. federal tax advice contained in this article, is not intended or written to be used, and cannot be used, by any person for the purpose of avoiding any penalties that may be imposed under the Internal Revenue Code
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Caufield & Flood participated in the Illinois CPA Society's first-ever
CPA DAY OF SERVICE on September 24, 2010. Michael Flood and staff
volunteered their day painting at Options & Advocacy in Crystal Lake.
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Greetings!
Due to complex IRS rules there are various choices involved in the usage of vehicles for business purposes. The ownership of the vehicle, either by the business or the employee dictates the choices available.
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Business Use of Automobiles
The car allowance method is one way to reimburse an owner or employee for his transportation costs by giving him a set amount each pay period. This amount must be included in W-2 wages and is subject to withholding and employment taxes. The individual is not required to report business usage to the employer. However, if documentation of business use is kept (via either the standard mileage or actual cost methods), an itemized deduction may be possible on the individual tax return if the amount is above 2 percent of adjusted gross income of the taxpayer.
Another alternative is to pay employees a standard mileage rate for all business mileage driven. The employee is responsible for submitting the date, mileage, and business purpose of each trip as support for the reimbursement. The IRS publishes the business mileage rate which is currently 50 cents per mile.
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Tax rules get complicated when a business purchases a vehicle for an owner or employee. For starters, the actual cost method must now be used. In addition to documenting business usage, documents must be kept supporting all vehicle expenditures, including maintenance, repairs, gasoline, and insurance. If personal usage (including commuting to and from the workplace) is permitted, a value for this usage must be added to the employee's W-2 wages, subject to withholding and employment taxes. This amount is determined by obtaining representations from the employees with personal, business and total mileage included. The personal usage value of the auto is determined using the employee's personal usage percentage and IRS lease value tables. The IRS eases bookkeeping requirements somewhat by allowing an alternative twelve month period to be used in order to obtain the documentation from employees and calculate the amount to include on W-2s. Usually a twelve month period ending on October 31 or November 30 is used.
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A depreciation deduction is also allowed. As expected with the IRS, there are elaborate rules for determining the amount. The type and weight of a vehicle impact the amount of depreciation, and should be considered when making a purchase. Although for tax purposes, vehicles are depreciated over five years, it can actually take much longer due to luxury auto rules. These rules may severely limit the amount of depreciation that can be taken in a given year for autos costing as little as $15,300.
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There are situations that can counter the restrictive luxury auto rules. Passenger vehicles with a Unloaded Gross Vehicle Weight of over 6,000 pounds and trucks and vans, including SUVs, with a Loaded Gross Vehicle Weight greater than 6,000 pounds are not subject to the luxury auto rules and generally may qualify for an additional first year depreciation expense of $25,000 or more. Business owners who do not use a car over 50% for business, even if all personal usage is included on the W-2, cannot take advantage of the additional first year depreciation.
In addition to all of these considerations, complications can arise when selling or trading in a vehicle. When a vehicle is traded in for another vehicle, like-kind exchange rules are applied. This means the exchange will not result in a current gain or loss for tax purposes, but increases the cost basis of the new vehicle. As a general rule, if the car's tax basis is higher than its market value, selling the car outright will allow the loss to be taken. If the Vehicle has a tax basis lower than its market value, a trade-in will avoid a taxable gain.
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If you have any questions please feel free to call our office.
Caufield & Flood
815-455-9538
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