Can I pay my car expenses from my business?

Wed, Nov 26, 2014 at 12:05PM

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My CPA has me paying my car expenses (gas and maintenance - I paid off the car already) from my business (S-Corp). In fact when he looked at my books last week he told me I could even spend more money as the amount was pretty low right now, but according to what everyone said above is this correct.



If I understand your question correctly, it appears you are concerned with the S-corporation paying the expenses of your automobile?

I can give you some guidance on your question, but first let me thank Sam Martin for providing some excellent information and well written posts regarding the steps and best practices the taxpayer needs to take to comply with taking the Automobile deduction.  For this reason I will focus responding to only the "Corporation paying expenses for a personal expense" question.

When an S-corporation pays for items such as fuel, insurance, repairs, etc. from the company account for a personally owned vehicle you need to be careful, and let me explain.

If the vehicle is personally owned and the company pays for the vehicle expenses such as fuel, insurance, lease payments the IRS auditor would quickly classify these payments as wages to the shareholder and the would also say they are not reimbursements (more to come on reimbursements in a minute).  They will say that the company does not own the vehicle and typically there is no written substantiation as to the business use of these expenses, in real life.  In this case, all of these payments discussed above would be reclassified and required to have payroll taxes withheld and then included on the shareholders W-2.  Yuck!  Not good and unfortunately this could be the direction your headed, however I really  don't know all of your facts.

So that stinks.  What can I do you ask?

While there is nothing wrong with making these payments in general, it is very important to follow specific rules to avoid having these payments treated as taxable wages to the shareholder.  One way to stay clear of the IRS scrutiny is to personally pay for the expenditures and have the company reimburse you for the money spent.  Now stay with me on this for a minute while I explain more.

Generally, the IRS says all payments to employees (you are an employee in this case) are deemed to be wages unless an exception applies.  The exception that you are looking for in this example is the Accountable Reimbursement Plan.  If the corporation has an Accountable Reimbursement Plan "IN WRITTING" and they  treat these expenses in accordance with the approved guidelines, the IRS will not bother you for these deductions.  The company payments made will remain a tax deductible expense for the practice and the money received by the shareholder will remain tax free.  Win, win.

So what is the catch to this Accountable Reimbursement Plan?

Good question, first it has to be in writing.  Next it requires proof of the business expense be submitted to the company within 60 days of the expense.  The receipt should have the date, dollar amount, and general business purpose and use clearly stated.  It is also a good idea to have the corporate minutes reflect the creation and adoption of the Accountable Reimbursement Plan for good measure.  Think of the process as a monthly expense report exercise that the doctor turns in their receipts and gets a tax free check from the company.

In a nutshell you can take the business deductions, if you follow the rules.

PS - This is a great example of how being proactive can really save you a bunch of money and heartache.

 Hope this helps...

Eric DeVriese, CPA
Trusted Business Advisor
We help Dentists build amazing practices

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