Tuesday, July 26, 2011

Can an S Corp Owner Receive Reimbursements for Section 179 Deductions?

   IRS regulation 1.62-2(d)(1) permits your S corporation to reimburse you for your employee expenses. The regulation identifies expenses suitable for reimbursement as those found in Part VI, Subchapter B, Chapter 1 of the Internal Revenue Code. Section 179 expensing is one of the many expenses in this section of the law that is identified as appropriate for reimbursement.

   So How Does This Work?

   For example, you purchase a used vehicle for $10,000. Your business cost is $8,000 based on your mileage log. You personally own the vehicle, but you want the corporation to claim Section 179 expensing on it.

   To make this work, you submit an expense report to your S corporation requesting reimbursement for your business expenses, this includes the amount of section 179 expensing. You must also submit to your corporation a mileage log that supports your business use of this vehicle. You must also submit a mileage log for each of the next 5 years, because this is the time during which your corporation could suffer Section 179 recapture if business use of the vehicle were to drop to 50% or less.

   The expense report and mileage log combination creates a tax-defined “accountable plan” that allows your corporation to deduct the expenses, and makes the reimbursements to you not taxable.

   Say you give your corporation a separate expense report just for the $8,000 Section 179 expense. Based on this request and the information from your mileage logs, the corporation writes a check to you for $8,000. The corporation deducts the $8,000 as a Section 179 expense as if it had purchased the vehicle itself, subject to the rules that apply to the corporation for its expensing.

   In general, your agreement with the S corporation will be for the corporation to reimburse all your actual vehicle expenses. If recapture should occur, your agreement could require you to reimburse the corporation for the recapture amount. Requiring the reimbursement is the easy way to handle this.

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