S Corporation Blog Series
This weeks S corporation blog series covers auto expense reimbursement and deduction by an S corporation.
Shareholder-Employee Mileage Deduction
As a shareholder-employee of an S-corporation, you may wonder what the best method is when it comes to deducting auto mileage expense. S-corporations have a close relationship with their shareholders because the income and losses of S-corps pass through to their shareholder’s personal income tax return. As a result, there may be confusion and uncertainty regarding the treatment of tax items that affect both the S-corporation and the individual. The tax treatment of auto expenses depends on who owns the vehicle; the shareholder or the business?
An S-corporation can deduct auto expense only if the vehicle used for purposes of the business is titled in its name. If the vehicle is title is in the shareholder’s name, the S-corporation should reimburse the shareholder for business miles driven. The S-corporation can then take an expense deduction for the amount it reimbursed the shareholder.
Once it has been established who owns the vehicle, the next step is to understand what activities warrant reimbursement. Allowable mileage includes travel from your place of business to a location where business is being conducted such as a business errand, a meeting with a client, or a travel related trip. Mileage reimbursement does not include commuting from your personal residence to the S-corporations place of business.
How Much Reimbursement Can I Receive?
The government establishes the yearly standard mileage rate. The rate usually changes each year. As of the date of this article, the standard rate is 54 cents per mile, down from 57.5 last year. Mileage reimbursement is not reported on the employee’s tax return provided the reimbursed amount does not exceed the federal rate for the year. If the amount reimbursed exceeds 54 cents per mile, the overage should be included as income on the shareholder-employees personal tax return.
Tracking Your Expense
Shareholder-employees or any employee who receives mileage reimbursement must keep a mileage log to receive reimbursement. The date and business purpose, the odometer reading at the beginning and end of the trip must all be logged for all business travel. Mileage reimbursements are based on the number of business miles recorded in the log. If the IRS decides to audit the mileage expense of the business, a record of the mileage log will be one of the first source documents requested.
Accountable Plan Agreement
It is always helpful for an S-corp to establish an Accountable Plan Agreement with its shareholder-employees and its regular employees. An Accountable plan is a written plan for which an employee is reimbursed or given an allowance for expenses he or she incurs on behalf of the business. An accountable plan informs the IRS that none of the reimbursement received by the employee is taxable, and therefore, is not required to be reported on form W-2. Conversely, any reimbursement paid to an employee under a Nonaccountable plan is taxable and should be included on form W-2. In case of a potential audit, the S-corporation should have an Accountable Plan Agreement for each employee it reimburses.
Have a great week!!!
Desarie Anderson, CPA, EA
Anderson Accounting, LLC