Auto-personal vs business

[imjulier]

As you all know, taxpayers that we work for never listen to us. I have an s-corp owner who took and traded in a car that was in the S-corp for a vehicle that he put in his own name. The business is an s-corp with 2 SH ownership split 50%/50%. What to do with the vehicle taken out of the business? Converted to personal use with no G/L is what I am thinking. New vehicle by the way will be leased back to the business for the cost of having the business pay his gas, insurance, maintenance and reapirs, etc. Any ideas?

Thanks,

Julie

[joanmcq]

Well, it's a distribution of property....

[OldJack]

Well, it's a distribution of property....

An S-corp does not convert an asset to personal use.

If its a distribution, it most likely is an unequal distribution between multiple shareholders and would be taxed to the receiving shareholder as a partial sale of stock. Also, the S-corp must treat it as a sale at FMV and pass the corp taxable gain/loss to both shareholders for personal 1040 income tax.

Or, maybe the shareholder bought the vehicle at FMV and gave the S-corp a promissory note bearing interest to pay for the vehicle. That would solve most of the problem, except the corp would still pass taxable gain to all shareholders on a k1 for tax.

You got to check with the shareholders to see exactly what they did because a tax preparer can't make that decision for them.

[joanmcq]

My comment wasn't on the 'converted to personal' level, but simply to get the ball rolling. I should know better than to comment when I really need to be napping.

[imjulier]

No worries. And thanks to both of you for your comments. I totally appreciate OldJack's suggestion of...

"maybe the shareholder bought the vehicle at FMV and gave the S-corp a promissory note bearing interest to pay for the vehicle. That would solve most of the problem, except the corp would still pass taxable gain to all shareholders on a k1 for tax." This would solve the problem but the SH has no intention of paying anything to the S-corp.

I believe I'll have the SH quit claim the new vehicle to the business which is how the last vehicle ended up in the business. Does anyone want to shoot holes in this as I am sure there are some?

I hate trying to fix what the shareholders actually did after the fact.

Thanks again for your input.

Julie

[OldJack]

>>shoot holes<<

This client is probably going to be a problem client. He probably will not want the value of personal use added to his W2 each year either. That may put his tax preparer in a tough spot. You might want to give him a copy of Pub 15B.

[imjulier]

Old Jack-

I agree 100%. They do not want personal use added to their W-2 so I have them sign a statemenmt every year which says that all use is business use. Maybe this covers me, maybe it doesn't. It may be time for me to drop this client....but I'll have to think about it. I appreciate your input and thoughts.

Julie