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Automobiles and LLCs, S Corps
By Jason Watson, CPA
Posted Tuesday, October 12, 2021
A question we entertain almost daily is “I want to save taxes. Should I have the business buy me a car?” Our auto-attendant replies with, “Do you need a car?” If you answer with “Yes” the auto-attendant replies with, “Hold please.” If your “Yes” is not quick or mumbled, or if there is any recognition of hesitation, the auto-attendant is unhappy.
We digress. There are only a few questions you need to ask yourself when considering a car purchase. Are you the type of person who buys new? How long do you typically keep your cars? Is the car 100% business use? How many miles do you plan to drive? There is a decision tree at the end of the automobile section.
Back up for a bit. Remember our previous discussions about tax deductions, and how only a fraction of the money you spend is returned to you? So, back to our auto-attendant, “Do you need a car?” If the answer is “Yes” because your bucket of bolts is getting exceedingly dangerous, then Yes, buy a much-needed car out of a sense of safety. If the answer is “Not really, but I want to save taxes,” then don’t.
Two rules to live by-
- Cash is King (keep it!)
- Depreciation is a tax deferral not a tax avoidance system (typically)
There might be some other external forces at play. For example, if you need a car next year but your income is ridiculously and unusually high in the current tax year, then reducing your income now makes sense. Again, tax modeling and planning is critical.
Ok, you’ve chatted with your car-loving buddies at WCG and we’ve determined that a car purchase should be in your near future, now what? There are all kinds of issues here, so, buckle up as we go through this stuff. There are four scenarios-
- Business Owned Automobile (mixed bag)
- You Own the Automobile, Get Reimbursed By The Mile (clean and elegant)
- You Own the Automobile, Take a Mileage Deduction (silly in an S Corp… oh and by the way, gone with the Tax Cuts and Jobs Act of 2017)
- You Own the Automobile, Lease it Back to Your Business (exotic)
We’ll start with the crowd favorite- Business Owned Automobile. Everyone’s default favorite. As we go through these, please excuse our interchange of vehicle, automobile and car. They all mean the same thing. And if you are being chastised by Tina Watson’s sister for bringing food into her Toyota 4Runner then she would use the word “vehicle,” with stark over-annunciation of each syllable like she was talking to someone who doesn’t know English.
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