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S Corp Shareholders: Turn In Your Expense Reports!

November 30, 2018

Small business owners often use their personal vehicles for business purposes, but they don't always reimburse themselves from their own company for that mileage. Instead, they typically deduct that mileage on their personal return. With the changes made last year for tax reform, that deduction is now gone.... but all hope is not yet lost.

 

Businesses can still get a deduction for business mileage , and for S corp shareholders, getting a reimbursement from the business for mileage is the best way to still get that deduction since the business's taxable income flows through to the shareholder's personal return. If you are the only shareholder in your business, then you get the direct full benefit of the deduction when it comes through on your K-1. For S corps that have more than one shareholder, the total deduction realized by each shareholder will depend on how much mileage each shareholder has to expense through the business. There will likely be winners, losers, and those who break even in the end. Of course, the biggest hurdle to getting this deduction is actually having the cash in the business to pay the reimbursement... but for those shareholders who are planning to take (non-deductible) distributions at year-end, you can instead get a (deductible) reimbursement if you haven't already been doing so. 

 

For C corporations, the benefit of the deduction stays with the business, but the benefit to the shareholder is that they are able to be reimbursed for the use of their vehicle, and the business will get a deduction to reduce it's overall tax burden. For smaller, closely-held corporations, that tax benefit is often still felt by shareholders who own and operate their businesses (and pay the tax bills).

 

Even if a shareholder doesn't have business mileage to expense, it's important for all employers to consider this change in tax regulation if there are employees who use their personal vehicles for business purposes and are not currently reimbursed for their mileage. It might be time to create a reimbursement policy to make this benefit available to employees since they will no longer get the benefit on their personal tax returns. Not only will your employees appreciate the reimbursement, but you'll get a tax deduction out of it too. That's a win-win!

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