2% shareholder in S corporation purchased a truck (>6000 lbs) and trailer for his business. Both are registered in his name, not the company name, and he wants to leave it that way. The trailer is 100% business, the truck is 80 to 90% business. He has set up a lease agreement with his company to pay him an amount that will cover his payments and his expenses. What is the best way to show income and expenses on the shareholder return? How can we reimburse him for depreciation? I've been told to claim income and expenses/depreciation on schedule E as "rental" but I cannot find anything to support that position.

asked 21 Nov '11, 17:21

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Susan K
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edited 21 Nov '11, 17:23


I recommend showing that he contributes both the truck and trailer to the company (Debit fixed assets, Credit his equity account). Calculate an annual lease value for personal use of the truck and report additional wages on W-2. This way, they can be depreciated and interest expense is a business deduction. If you report the transaction using a schedule E (no I have never heard of doing it that way), he will have suspended rental losses until he disposes of the vehicles, because the company is not "renting" it from him--there is no rental income. This suggestion is based on my understanding of the situation.

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answered 22 Nov '11, 14:37

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Jessie
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Thank you Jesse - this would be logical, except the loans on both are in his name. If he contributes them to the company, he can't pay off the loans. The bank will not allow the company to take a loan on the vehicles because it's a start up. He can't transfer title without paying off the loans, so I think we're stuck. Based on additional research, I believe the correct way to report the lease income is on Schedule C - E doesn't sound correct. He could take depreciation and we could build it into the lease payment (I think!)

(22 Nov '11, 14:57) Susan K

First, for the income on his personal tax return, Schedule E is NOT where the rental of personal property goes. It goes on Line 21 as other income - see the Form 1040 instructions, Page 27 , Line 21 Other Income, Middle Column, third bullet from the bottom.

The related expenses are an adjustment to income on Line 36 - see the Form 1040 instructions, Page 33, Line 36, Middle Column, third bullet from the TOP.. You'll need to attach a schedule detailing the expenses, including depreciation. So you'll need to include Form 4562. Second, the Company reports the rental payments as rent and issues a 1099-MISC Box 1 to the shareholder. Also, Reg. § 1.469-2(f)(6) recharacterizes so-called “self-rental” income as non-passive. So there should be no issue with suspended passive losses.

A few other things - I generally don't like to see stockholders rent personal property back to their businesses because if cash flow gets tight and they fail to actually MAKE the rent/lease payments then it creates an opportunity to pierce the corporate veil. When the stockholder fails to enforce a self dealing contract it makes it easy for the authorities, or creditors, to utilize the Alter Ego Doctrine.

I much prefer the use of an Accountable Reimbursement Plan - whereby the stockholder tracks their business related mileage (which needs to be done regardless of who owns the vehicle), submits a regular expense reimbursement request and the company reimburses the stockholder directly.

Alternatively, the stockholder CAN in fact sell the property to the company, as Susan K suggested. It will be a little different because you can't change the title until the loans are satisfied. But that can be worked around simply by including in the "sales contract" a provision that title will pass AFTER the last payment has been made.

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answered 23 Nov '11, 10:56

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EAgent
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Thank you EAgent - this makes complete sense. Appreciate your help!

(23 Nov '11, 11:19) Susan K
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Asked: 21 Nov '11, 17:21

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Last updated: 23 Nov '11, 11:19