Auto distribution

[Avs19]

Scorp purchased a vehicle for a shareholder back in 2015 for $65154. 85% business use (55381). In 2023, the Scorp decided to let him keep the vehicle. At the time, the value on the balance sheet after depreciation was $26683. The FMV, according to the client was $9851. This would reflect a loss of $16910 (26683 - 9851). Trying to figure out how to remove this from the balance sheet and how the loss will be treated on the P&L?

[IRonMaN]

Was the value of the vehicle added to his W-2?

[Avs19]

No. Should that have been in 2015 or 2023?

[IRonMaN]

2023.  It could possibly be shown as a distribution but you don't say how many shareholders are involved so you are at risk of killing the sub S election if there were unequal distributions made during the year.

[IRonMaN]

As a side note, in a sub S, the vehicle is 100 percent business.  Any personal use is required to be added to the employee's W-2.

[qbteachmt]

"the vehicle is 100 percent business"

All the way back to 2015...

[Avs19]

There are multiple shareholders. Is it possible to 1099 him for the FMV?

I took this over recently. I guess the 15% personal use should have been included as wages years ago.

[IRonMaN]

It should go on his W2

[qbteachmt]

Personal use of a corporate asset is a Taxable Fringe Benefit. If he personally paid for any part (such as, put in his own gas) that can be taken into consideration. You don't get free use of a company car for personal use.

[Avs19]

It should, but I doubt they'll amend the W2. Do you think a 1099 will suffice?

[IRonMaN]

Since it was supposed to be on a W2, there should be Medicare and Social Security involved so if you are going through the back door you probably want to go with a 1099NEC

[Avs19]

Ok, so as I understand it, he should report $19624 (9851 FMV + 9773 Personal use) on a 1099NEC and the company can take a $16832 loss.

[IRonMaN]

You don’t tend to pick up 8 years of personal use all in one year.  You also might want to do a little research to see if a sub S can take a loss on the sale of an asset to a related party.

[Avs19]

The loss should be allow because the shareholder is under 50%. Any recommendations on the personal use portion?

[qbteachmt]

"The loss" I take it you are referring to the loss on disposal of asset, for the S Corp?

"Any recommendations on the personal use portion?"

The personal use is an annual event. It's a bit late to go back to 2015. There is supposed to be 100% business vehicle, because the corporation owns and operates it, maintains and insures it. The 15% personal use you describe is the taxable portion, which turns the amount into part of compensation (and is taxed through payroll) as taxable fringe benefit, and that expense is offset by "contra-expense" to the auto expense the corporation incurs.

And each year end, personal use of company vehicle is reported as part of payroll, meaning, W2, etc. Are you going to address that, or just dispose of the vehicle by "selling" it to the employee?

"the Scorp decided to let him keep the vehicle"

And it seems your person isn't going to pay for it? You don't get a free vehicle off of your employer. Are there other shareholders?

[taxiowa]

How long was vehicle depreciated for.  Seems like it was over 6 years ago and adjusted basis should be gone for vehicle with class life of 5 years.

[qbteachmt]

"Seems like it was over 6 years ago"

Yes, shoot, I meant to add that. I see we were told "multiple shareholders." And the whole "bought for a shareholder" is odd.

You might stop using the word distribution for this vehicle. That's probably the worst option.

Do the other shareholders have some arrangement that is equivalent in value (even though it might also have been handled wrong, I suppose), or did they approve something very one-sided? There are other options. Example:

Sell the vehicle to the person, at FMV, and list it as $ owed from employee to be paid over time. The employer has the right to bonus an employee through compensation at any time (avoids the distribution issue). A $9851 debt to the employer might require a $12k bonus, taxes compute, and then there is an after-tax net takehome pay deduction that pays for the debt to the employer.

What a mess. I always wonder how these things go so wrong for so long.

[Avs19]

I am referring to the loss on the disposal of the asset, for the Scorp

"And it seems your person isn't going to pay for it? You don't get a free vehicle off of your employer. Are there other shareholders?"

There are 5 shareholders and they decided to let him keep the vehicle. This is why I was thinking of issuing him a 1099 for the sale.

I don't think they're going to want to go back to amend for the personal use portion. 

I'll have to look into why it was not completely depreciated at this point. 

[TaxGuyBill]

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@taxiowa wrote:

How long was vehicle depreciated for.  Seems like it was over 6 years ago and adjusted basis should be gone for vehicle with class life of 5 years.

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The Luxury Limits were crazy low back in 2015.

[Avs19]

That's a good question. I don't see why it hasn't been fully depreciated at this point. 

[qbteachmt]

"There are 5 shareholders and they decided to let him keep the vehicle."

Which is why it should be changed from the concept of Distribution to more like a sale/purchase.

"This is why I was thinking of issuing him a 1099 for the sale."

No, that's is not called for, even if none of their good intentions had come into play. If you sell it to me, you don't also issue a 1099 of any sort. A sale of a vehicle doesn't warrant a 1099. You can't try to use a 1099-anything to bypass something that is supposed to be in payroll.

I gave how to accomplish it, in payroll. Give him a bonus, and then use the net of the bonus to "buy" the car. Done and legit. Do it in 2024. Put it on the books for the end of 2023. What you are doing is disposing of a tangible asset (the vehicle) by turning that value into an amount owed to the corporation (which also is an asset).

[Avs19]

That makes sense. What about the personal use portion that should have been included years ago? Should that be included on the 2024 W2 as well?

[IRonMaN · Accepted solution]

Just leave the dead horse stay dead and move on.

[Avs19]

Thank you all for your help!