If you've transitioned from a sole proprietor to a corporation and are wondering about the tax implications for your business SUV, you're in the right place. A common question arises about whether a corporation can reimburse its owner-employee for actual expenses on the SUV, including the Section 179 deduction and MACRS depreciation. Let's dive into the IRS regulations and clear up any confusion.

The IRS Stance on Reimbursements

According to IRS Regulation Section 1.62-2(d)(1), corporations can indeed reimburse employees, including owner-employees, for a wide range of business expenses. These reimbursable expenses encompass trade or business expenses, interest, taxes, losses, bad debts, and notably for your situation, depreciation and Section 179 expensing.

Real-World Application

Historical precedents, such as The Ralph M. Parsons Company case, demonstrate the IRS's acceptance of reimbursing employees for a portion of depreciation on assets used for business purposes. Although the specifics of what qualifies for reimbursement have evolved over time, the principle that depreciation can be reimbursed remains valid.

How to Ensure Compliance

To comply with the accountable plan rules and ensure that reimbursements are not considered taxable income, you must:

1. Incur Expenses During Duties: The expenses must be incurred while performing duties for the corporation.

2. Substantiate Expenses: You must provide the corporation with documentation that supports the expenses, adhering to the specific conditions imposed by the Internal Revenue Code.

For vehicle expenses, this means proving the business use of the vehicle, such as maintaining a detailed log of business use and having receipts for expenses over $75.

The Importance of Proper Documentation

The corporation essentially acts as an IRS auditor, verifying that the expenses meet legal requirements. Failure to provide adequate proof could result in the reimbursements being added to your W-2 income, leading to potential payroll tax penalties.

The Desired Outcome

With proper documentation and adherence to the accountable plan rules, the corporation can deduct the reimbursed expenses, and you, the owner-employee, receive the reimbursement tax-free. This approach is far more advantageous than claiming the expenses as employee business expenses on your personal tax return, which could subject them to limitations or disallowances under the alternative minimum tax (AMT).

In summary, your tax course is correct: your corporation can reimburse you for actual expenses on your business SUV, including depreciation and the Section 179 deduction. This strategy not only ensures compliance with IRS regulations but also maximizes your tax benefits. Remember, the key to success is meticulous documentation and adherence to the accountable plan rules. By following these guidelines, you can confidently navigate the tax implications of your business vehicle expenses.