It´s getting to be that time of year when business owners become concerned with the mechanics of getting tax returns completed — or at least getting a close enough estimate to file an extension without worrying about substantial penalties (an extension only extends the due date of the return, not the deadline for payment of the tax).
As long as I keep getting questions from readers, I´ll answer them here if the question and answer might be of general interest.
MW writes that she and her son run a business together. They incorporated the business two years ago.
MW´s Question: The corporation owns the van we use to make deliveries for the business. I use the van mostly for business, but I also use it for personal use, like shopping and taking my grandkids camping. My CPA says I have to count the personal use of the van as compensation from the corporation, but I thought if the corporation owns the van, it´s 100% deductible.
Answer: The costs of buying, maintaining, and running the van are deductible by the corporation. However, you and your corporation are two different taxable entities. Your CPA is correct — when the corporation allows an employee to use the van for purposes other than the corporation´s business, in most cases, the value of the use of the van must be treated as compensation to the employee.
I know you´re looking at that "in most cases" qualifier in the last paragraph and wondering. Working condition fringe benefits are excludable from the employee’s income. The most common examples I´ve seen involving company cars (other than use of the company vehicle for company business) would be the case where an employee who normally uses public transportation works late and misses the last bus or train of the evening, or where public transportation might be dangerous late at night. So the employee is allowed to drive a company car home and bring it back the next day. It´s possible that excludable fringe benefits of this sort could arise within the context of an owner of a closely held business using a company car, but it would be unusual.
Determining whether or not an employee´s use of a company vehicle should be taxable is fairly easy. Your use of her corporation´s van to do personal shopping and take your grandkids on camping trips is almost surely taxable compensation to you. The hard part is determining the dollar value of the compenstaion.
The Tax Code tells us to use Fair Market Value of a fringe benefit for the taxable income, which is the amount that an individual would pay for the particular fringe benefit in an arm’s-length transaction. The Tax Code and Regulations provide special valuation rules, but these are not available for the use of owners 1% or more of a corporation´s stock, so you’re on your own as far as figuring out the fair market value of your use of the van. The courts have said that fair market value depends on all the facts and circumstances of the case. What this means, practically speaking, is: the more evidence you have to support the value you use, the better off you´ll be if IRS ever audits your return.
Rental value of a comparable vehicle, the corporation’s costs of owning and maintaining the van, your costs associated with using the van (for example, if you replaced one of the van´s tires when you were using it) are relevant; or you might keep track of your mileage and determine a cost per mile, or use the standard mileage rate (48.5 cents per mile) or whatever rate the corporation uses to reimburse its employees when they use their own vehicles to do company business.