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Employee-shareholder – more than 5%- driving S Corp vehicle 20% for personal use and Form W-2.

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Level 1

The S Corp depreciates the vehicle and takes expenses for ONLY 80% (business use). Must the value of personal use be included on employee-shareholder’s Form W-2, Box 1?

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Level 13

I think you mean to be using "2% Shareholder" as your measure for the employee that has a taxable fringe benefit from using this 100% company-owned vehicle for personal needs.

The corporation owns the car, and covers all costs, and gets the 100% tax deduction from it. Separately, the employee either Pays for the value of their personal use, or is Taxed on the value of that use.

Think it through first with no taxable fringe benefit to anyone.

Now, add into your mix the personal use, which is like a payroll Addition + Deduction. The amount as expense for taxable fringe benefit is Added to payroll, but the same Value is Deducted from payroll, too, to avoid paying it out as real funds. They already got the benefit of the use, so you do not want more funds paid out.

The difference is the taxable event's taxes. Not the Vehicle Benefit value; that isn't in the financial reporting twice.

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Level 1

Probably I’m missing something here, but I guess there are additional costs for example SS and Medicare. But this is not my point. I'm focus on the question whether the S Corp must include always the benefit on Form W-2 or there are other options.

My point is that personal use of a company vehicle is not qualified business use, even though the company properly reports employee-shareholder.

In my example the 20% personal use of the vehicle expenses is neither tax deductible for the S Corp nor the employee-shareholder. It looks similar whether the employee-shareholder owns the vehicle and does not request expenses reimbursement from the S Corp. Nobody takes income or expenses.

Thank you for sharing your point of view.

 

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Level 15

The correct road to follow is to report 100% of the costs on the Corp return and the value of the personal use goes on the employee’s W-2.

ex-AllStar, ex-Lutefisk taste taster, ex-ACME product tester
and ex marks the spot where those rocks and anvils hit me.
Highlighted
Level 12

@IRonMaN wrote:

The correct road to follow is to report 100% of the costs on the Corp return and the value of the personal use goes on the employee’s W-2.


 

I agree that is the correct way.  But how do the deductions work for the corporation?  If it deducts 100% of the vehicle cost AND deducts wages, isn't that double deducting a non-business expense?  One of those are offset by the taxpayer reporting it as income (on the W-2), but then the net result is deducting a personal expense.

Hmmm.

 

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Level 13

"If it deducts 100% of the vehicle cost AND deducts wages"

That's not how it comes out. I teach payroll, so let me explain this year end benefit:

The value of the use is Added to the paycheck, so that taxes compute, as part of Gross. Then, that same amount is Subtracted from the paycheck as Net (reducing takehome), to avoid paying it out as real dollars. The two activities Wash away each other in the Fringe Benefit account, so there is no increase in Wages. Some people take that Reduction in the account from their Vehicle Expense account, leaving 80% as vehicle cost and the 20% as Fringe Benefit cost.

$1,000 wages + $1,000 benefit = $2,000 taxable. Let's go with $500 total taxes for that employee. That leaves $1,500 takehome; deduct the $1,000 Benefit = $500 takehome.

"In my example the 20% personal use of the vehicle expenses is neither tax deductible for the S Corp nor the employee-shareholder. It looks similar whether the employee-shareholder owns the vehicle and does not request expenses reimbursement from the S Corp. Nobody takes income or expenses."

But that's not the right comparison. Not requesting to be reimbursed and not filing it is a Choice, but not the facts.

"My point is that personal use of a company vehicle is not qualified business use, even though the company properly reports employee-shareholder."

The 20% of the use that is personal is a Business Expense as Taxable to the employee because it is a "free benefit" otherwise. The IRS requires it to be taxed. Asking us why Not to do so, isn't really a valid question.

Here's the original question: "Must the value of personal use be included on employee-shareholder’s Form W-2, Box 1?"

Yes, it Must, per the IRS.

 

If they don't want to do it right, why allow this vehicle to be used personally? Park it at the office all the time and only use it for Business.

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Level 15

There's no gap in this.  The company takes the deduction based on 100%.  80% is attributable to business use and the remaining 20% to benefit costs of the shareholder-employee.

For W-2 reporting purposes, a different set of rules applies to the valuation of fringe benefits.  The business would determine the reportable compensation based on ALV unless the cents-per-mile rule is permissible.  Note, however, only maintenance and insurance costs are baked into these imputed amounts.  If the business paid for other expenses related to the shareholder-employee's personal use, those expenses will need to be accounted for separately.

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Still an AllStar
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Level 1

Hello, thank you for your feedbacks.

About my doubt:

  1. Section 1372(a) provides that, for purposes of applying the income tax provisions of the Code relating to employee fringe benefits, an S corporation shall be treated as a partnership, and any 2-percent shareholder of the S corporation shall be treated as a partner of such partnership. In short, more-than-two-percent shareholders are treated like partners in a partnership.
  2. Qualified business use (Form 4562. Part V. Section A. Listed Property, line 26 y 27).

Generally, a qualified business use is any use in your trade or business. However, it does not include: the use of the property as compensation for services performed by a 5% owner or related person.

 

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Level 10

Qualified business use for the purpose of determining the depreciation method doesn't include the personal use.  So in your example, you have 80% qualified business use.  Since that is more than 50%, the S Corp can use accelerated depreciation.  If, in a later year the QBU drops to 40% (because the S Corp owner has 60% personal use) then the S Corp will have depreciation recapture to the extent of accelerated depreciation.

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Level 13

I don't understand your "doubt." You asked: "Must the value of personal use be included on employee-shareholder’s Form W-2, Box 1?"

Answer: Yes.

Start here: https://www.irs.gov/publications/p15b

"Are Fringe Benefits Taxable?

Any fringe benefit you provide is taxable and must be included in the recipient's pay unless the law specifically excludes it. Section 2 discusses the exclusions that apply to certain fringe benefits. Any benefit not excluded under the rules discussed in section 2 is taxable.

Including taxable benefits in pay.

You must include in a recipient's pay the amount by which the value of a fringe benefit is more than the sum of the following amounts.

  • Any amount the law excludes from pay.

  • Any amount the recipient paid for the benefit."

There isn't a carve out for any % shareholder here; not 2%, not 5%, not 10%.

And: https://www.irsvideos.gov/Business/FilingPayingTaxes/EmployerProvidedVehicles

"When your employees use an employer-owned vehicle for personal use - that is a taxable fringe benefit and you must report the value of that use on their W-2.

Personal use of a vehicle means nonwork-related purposes such as: the commute between home and work, using it on the weekend or for a vacation, or someone other than your employee using it like a family member, friend, or neighbor."

I'll give you an example: Where I worked, we had 3 company owned trucks: 3/4 and 1 ton. They got used for hunting every fall, and those employees were taxed on the value for their trips. Whenever one of the trucks also was used by one of the shareholder-employees to haul a horse trailer to the spouse's races, that also is taxable personal benefit.

"and takes expenses for ONLY 80% (business use)."

Your employee doesn't get that for free; just ignoring it on the corporation's tax return does not make the ignored portion free to that person.

As I pointed out, it can be reported two ways:

100% vehicle expense

or

100% vehicle expense, reduced by 20% as "compensation" under Taxable fringe, which "moves" that 20% (the taxable value that you determine per the tables that apply) to Compensation expense.

That second formula seems to be what you want to do. A combination of them seems to be what you are doing, which doesn't comply with the IRS. No matter what, you have a condition of 100% corporate ownership and operating expense. Otherwise, these people should stop doing this and use Personal vehicles and turn in mileage reports.

It's easy to do it right.

 

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Level 1

 Dear qbteachmt (Level 13),

Thank you for your feedbacks. I think you are missing at least two regulation.

1. Section 1372(a) provides that, for purposes of applying the income tax provisions of the Code relating to employee fringe benefits, an S corporation shall be treated as a partnership, and any 2-percent shareholder of the S corporation shall be treated as a partner of such partnership. In short, more-than-two-percent shareholders are treated like partners in a partnership.

2. Qualified business use (Form 4562. Part V. Section A. Listed Property, line 26 y 27).Generally, a qualified business use is any use in your trade or business. However, it does not include: the use of the property as compensation for services performed by a 5% owner or related person.

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Level 12

@mlcpa   Can you clarify why you keep pointing those out?  Everybody is agreeing with those.

 

Your first point means it is TAXABLE to the employer/shareholder.  That means it goes on the W-2.

Your second point means that on the corporate return (at least for depreciation), only 80% is taken as a business expense ("qualified business use").  The other 20% is wages.  So 100% of the expense is on the corporate return, but it is split between "qualified business use" and wages.

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Level 1

Dear TaxGuyBill,

     The tax treatment of fringe benefit paid to owner-employees of an “S Corp” is different form the tax treatment for other employees.

     26 U.S. Code Section 1372(a) provides that, for purposes of applying the income tax provisions of the Code relating to employee fringe benefits, an S corporation shall be treated as a partnership, and any 2-percent shareholder of the S corporation shall be treated as a partner of such partnership. In short, more-than-two-percent shareholders are treated like partners in a partnership.

Interesting feedbacks but they do not address the point I'm asking. For your convenience you can check https://www.law.cornell.edu/uscode/text/26/1372 and then let me know.

If you still understand that feedbacks are correct, I'm going to close this discussion.

To All, thank you for your time and consideration.

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Level 13

You posted this while I was replying: "and any 2-percent shareholder of the S corporation shall be treated as a partner of such partnership"

 

Yet, in your title ("more than 5%- driving S Corp vehicle 20% for personal use and Form W-2.") and originally, you tried to note that 5% would be your guidance.

The Fringe Benefit regulations fall under differing % because they provide for different plans, such as Adoption vs Vehicle use; and the tests for highly compensated employees and to avoid impartial treatment of employees. Mostly, all of this is to help avoid personal life costs being shifted into a corporation's expense reporting to benefit the shareholders personally.

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Level 1
FYI. A partner is not considered an employee.
 
 
Question
Are partners considered employees of a partnership or are they considered self-employed?
Answer

Partners in a partnership (including certain members of a limited liability company (LLC)) are considered to be self-employed, not employees, when performing services for the partnership.

https://www.irs.gov/faqs/small-business-self-employed-other-business/entities/entities-1#:~:text=Are...

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Level 13

"FYI. A partner is not considered an employee.

 
 
Question
Are partners considered employees of a partnership or are they considered self-employed?"
 
You asked about an S Corp.
 
You seem to want to debate something with Peer users, who responded to your initial question for how you asked it. You clearly misunderstood that the Use it taxable, as Fringe, and is considered by the IRS as a form of compensation for working there. Your initial belief for 80/20 isn't wrong; not including the other 20% is what was wrong. Not including it as Payroll was wrong. It doesn't need FIT withheld, but it is taxable under FICA.
 
If you intend to debate the intent of the IRS and Congress, we are not the right opposing counsel for that discussion. We can be audience to your own internal debate, of course.
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Level 12

@mlcpa wrote:

Dear TaxGuyBill,

     The tax treatment of fringe benefit paid to owner-employees of an “S Corp” is different form the tax treatment for other employees.

     26 U.S. Code Section 1372(a) provides that, for purposes of applying the income tax provisions of the Code relating to employee fringe benefits, an S corporation shall be treated as a partnership, and any 2-percent shareholder of the S corporation shall be treated as a partner of such partnership. In short, more-than-two-percent shareholders are treated like partners in a partnership.

Interesting feedbacks but they do not address the point I'm asking. For your convenience you can check https://www.law.cornell.edu/uscode/text/26/1372 and then let me know.

If you still understand that feedbacks are correct, I'm going to close this discussion.

To All, thank you for your time and consideration.


 

Yes.  That is what everybody is saying.   Fringe benefits are tax-free to most employees, but are taxable to the shareholder employees.

Fringe benefits given to a Partner are Guaranteed Payments, subject to income tax and sometimes Social Security tax, and Medicare Tax.

As you keep pointing out, the same rules apply to the shareholder-employee of the corporation.  They are subject to income tax, and sometimes Social Security tax, and Medicare tax.  In other words, they are wages on the W-2.  That is what everybody keeps telling you, and you keep citing the same thing that just proves what everybody else is saying.

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Level 13

Well, generally fringe benefits are taxable to the person who is an employee or not. There are "qualified" fringe benefits that are tax free to the party receiving that benefit; and it can even be provided not to the employee directly, but someone in their family, and not by the employer directly, but a third party. From the IRS guidelines:

https://www.irs.gov/businesses/small-businesses-self-employed/employee-benefits

"Fringe Benefits

Fringe benefits are generally included in an employee’s gross income (there are some exceptions). The benefits are subject to income tax withholding and employment taxes. Fringe benefits include cars and flights on aircraft that the employer provides, free or discounted commercial flights, vacations, discounts on property or services, memberships in country clubs or other social clubs, and tickets to entertainment or sporting events.

In general, the amount the employer must include is the amount by which the fair market value of the benefits is more than the sum of what the employee paid for it plus any amount that the law excludes. There are other special rules that employers and employees may use to value certain fringe benefits. See Publication 15-B, Employers' Tax Guide to Fringe Benefits, for more information."

This is why relying on the IRS is the best course:

https://www.irs.gov/publications/p15b

 

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Level 15

Removed duplication...

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Still an AllStar
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Level 15

@mlcpaYou seem to have misunderstood the application of the law and regulations.  There is no question personal use of company vehicle is a taxable fringe benefit.  As explained in my post earlier, 80% of the vehicle is considered business use and 20% should be classified as benefits cost of the employee-shareholder.  @qbteachmt has also given you two alternatives for accounting and explained them in details by way of examples.

Your understanding of Sec. 1372 is flawed.  First of all, guidance for that code section covers only the tax treatment of medical insurance premium paid for 2% shareholder-employees of S-corp and serves to clarify that employee fringe benefits paid or furnished to these individuals are not excludable (e.g. under Part III, Subchapter B, of Chapter 1) unless the related provision specifically provides that it applies to partners.  Consequently, employee fringe benefits not excludable to 2% shareholder-employees are treated as guaranteed payments under Sec. 707(c) and includable as such shareholder-employees' gross income, as required under Sec. 61(a).  By the same token, the S-corp is entitled to deduct the costs of such fringe benefits under Sec. 162(a).  In the case of medical insurance premium paid for or on behalf of a 2% shareholder-employee, the shareholder-employee may then take an above-the-line deduction pursuant to Sec. 162(l).

In fact, personal use of employer-provided vehicle is not even an excludable fringe benefits under Sec. 132 or other sections of the Code, whether or not the individual is to be treated as an employee or partner for income tax purposes.  In this particular case where the company-owned vehicle was provided to the 2% shareholder-employee for personal use (other than as transportation for medical reasons), Sec. 61 and Treas. Reg. 1.61-21 dictate that the value of this fringe benefit must be included in the individual's gross income.  Subsection (a)(4)(ii) of the reg. is also specific that partners are within the definition of employees.  Subsections (d) and (e) then go on to outline the applications of ALV and cents-per-mile methods mentioned in my original response.

There is no question the value for the 2% shareholder-employee's personal use of company car is reportable as wages on the W-2 and that the S-corp could take a deduction for the 20% related to benefit costs as explained in various ways above.

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Still an AllStar
Highlighted
Level 13

From the instructions for Form 4562:

"Treat vehicles used by employees as being used 100% for business/investment purposes if the value of personal use is included in the employees' gross income, or the employees reimburse the employer for the personal use."

If you want to keep trading Citation, we're here all day.

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