If my corporation leases a car for me, then it is a 100% deductible expense and I don't have to keep a log, right?

The correct answer is a "trick answer," but for now you can assume that the answer is "no."

Let's say that your corporation rents a car for you to use. The cost is $8,000 per year. This is what happens.

1. Your corporation deducts the entire $8,000.00 as an expense, as you expected.
2. You still have to keep a log, which you did not expect.
3. You drove the car 14,650 miles for the year.
4. Your log shows 8,652 business miles.
5. So, your business use is 8651/14650=59% and
6. your personal use is 41%.
7. The corporation still deducts 100% of the $8,000; however, the corporation must show an extra $3,280.00 personal use for the car on your W-2. You are astonished. You have to pay tax on the personal use of the car.

OK, but what if my company leases a Rolls Royce or Bentley? Isn't that a clever way of deducting one heck-of-a luxury?

No, it does't work.

The IRS has something called "inclusion amounts." IRS says it is alright to rent a car for, depending on the year and other factors, $25,000. But if you lease one for $32,000, the corporation is supposed to add anywhere from $100 to $500 to your W-2 income in this example. The Rolls Royce or the Bentley would add $6,000 to $10,000 to your W-2.

The IRS has another rule. You may deduct only expenses that are "ordinary and necessary" for your business. Unless you have a taxi service for movie stars and rock stars, the IRS would probably consider the Bentley or Rolls Royce as beyond "ordinary and necessary" and disallow the whole deduction.

It is much simpler to lease the car yourself, keep a log, and turn in your business mileage to the corporation now and then for reimbursement at the current rate.

Copyright © - 2007 Dutch Hawkins Mandeville, LA USA - All Rights Reserved
May 4. 2007.