Just created a S corp and what to do with my tractor?

[alia176]

Good morning all,

As of the first of this year, I'm now working for myself as an Engineering consultant. This is very scary for a lifelong W2 guy and very exciting at the same time. My reason for doing this is so that I can do engineering work, tractor work and 4x4 vehicle based fabrication work. My bread and butter will be the engineering work but it'd be nice if the tractor can at least pay for itself somewhat :laughing: Who knows, maybe I can finally build a shop and write that off somehow!

My CPA helped me setup a S corp and I'm paying myself a salary. One aspect of this company will be to perform landscape work with the tractor/backhoe and to that end I need to figure out what's the best way to bring the tractor into my business. I'm making monthly payments on the tractor to Mahindra finance and would like some means of tax relief or depreciation, etc. Please educate me on this process as my mind is full of clutter from reading the internet info!

Thank you.

 

[davesl708]

Congrats on the new business endeavor. You might consider leasing the tractor to your corporation. In my previous company the company leased the aircraft from the CEO who was also a pilot.
You get personal compensation for the use of the tractor and keep the tax benefits.

Discuss it with your CPA.

 

[smstonypoint]

Congrats on the new business endeavor. You might consider leasing the tractor to your corporation. In my previous company the company leased the aircraft from the CEO who was also a pilot.
You get personal compensation for the use of the tractor and keep the tax benefits.

Discuss it with your CPA.

Good advice from Dave regarding leasing. There's a lot of info available -- Google leasing equipment to your own company. A tax professional can advise you about the ins and outs. The IRS might frown on the use of the tractor outside the business (i.e., for personal use).

Steve

 

[Steppenwolfe]

You will be better off with two tractors. one business, one personal. You are on shakey ground mixing them together.

 

[MidTn Mark]

One man calls it personal use while another calls it maintaining skills and proficiency on heavy equipment.

And, while I am in fact staying at a Holiday Inn Express tonight I am not a CPA nor am I a tax attorney and that should not be construed as sound legal advice...

Mark

 

[skyhook]

Don't forget to claim those Hotel expenses, Mark.

 

[chim]

On this site there is a lot of information on tractors and equipment that is generally good. I'd go back to your CPA for this discussion.

 

[alia176]

good info gents, thank you. I'll ask my CPA but leasing to the company seems to be the thing to do.

Copy/paste from https://www.activefilings.com/resources/reference/leasing-assets/

By Alex Goumakos

While there are many equally valid reasons to incorporate, saving money on taxes is a consideration that can yield relatively immediate results. Leasing assets to your corporation is a tax strategy you should absolutely consider if you already have a corporation or are thinking about forming one. Here痴 how it works.

Just because you incorporate doesn稚 mean that the corporation must own all of the assets it uses. In fact there are many legal, tax and financial considerations for NOT having your corporation own its own assets.

Leasing assets to your corporation is a perfectly legal and advantageous way to reduce your overall tax liability. When you lease assets to your corporation, the business pays a lease or rental payment and you in turn claim the lease or rental income. By doing this, you as the lessor get to deduct items such as acquisition interest, depreciation, repairs and maintenance, insurance and administrative costs.

When interest and depreciation deductions are exhausted you can then transfer the assets to a family member in a lower tax bracket or you can sell the assets to the corporation. A sale to the corporation would give it a higher tax basis (cost) than it had in the hands of the lessor (you). This would increase the corporation痴 depreciation deductions, thereby reducing its tax liability.

If you haven稚 noticed already, leasing assets to your corporation is a fabulous way to pull money out of the business instead of through payroll. When you take a paycheck, you致e got payroll deductions to consider. Not so when you take a rent check.

Another reason to lease assets to your corporation has to do with double taxation. If your corporation sells appreciable assets for a big gain, and you try and take the money out of the company, you will get clobbered with taxes?wice. This will not be the case if you lease the asset to the corporation. Under this scenario, you will only be taxed once.

From a legal standpoint, it痴 also better to have your corporation own as little assets as possible if you are in a 塗igh risk industry subject to lawsuits. If you lease assets to your corporation and your corporation gets sued, it痴 tough for a hostile party to seize the assets if they are in your name and NOT the corporation痴.

You may rent almost any asset to your corporation. Examples include, office space, machinery and equipment, vehicles, computers and peripherals and real estate.

Besides renting the assets personally, you may use a multiple entity arrangement such as partnerships, S corporations or limited-liability-companies to rent the assets to a corporation. However, you shouldn稚 use another regular corporation because it may be deemed a personal holding company (where most of its income is from passive income such as rents and royalties, etc.). Personal holding companies are subject to a penalty that would defeat any tax savings rental strategy.

The requirements for leasing assets to your corporation are as follows:

You must draw up a formal and bona fide lease agreement. You should treat the leasing agreement just like you would if you were dealing with an unrelated party.
The rental amount you establish must be fair. In other words, you can稚 charge anything you want. It has to be reasonable and in line with what痴 being charged for rental of similar assets in your area.
So there you have it, more good reasons to operate your business as a corporation. My final piece of advice is this: Make sure you consult with your attorney and tax advisor before making any important legal or financial decision. As with most things legal or tax-related, there are many exceptions and special rules that apply. Your attorney or tax advisor will be able to advise you correctly based on your own unique circumstances and objectives.

 

[Steppenwolfe]

I would go ahead and set money aside for your first IRS audit. That leasing game is a huge red flag.

 

[Buppies]

good info gents, thank you. I'll ask my CPA but leasing to the company seems to be the thing to do.

Copy/paste from https://www.activefilings.com/resources/reference/leasing-assets/

By Alex Goumakos

While there are many equally valid reasons to incorporate, saving money on taxes is a consideration that can yield relatively immediate results. Leasing assets to your corporation is a tax strategy you should absolutely consider if you already have a corporation or are thinking about forming one. Here痴 how it works.

Just because you incorporate doesn稚 mean that the corporation must own all of the assets it uses. In fact there are many legal, tax and financial considerations for NOT having your corporation own its own assets.

Leasing assets to your corporation is a perfectly legal and advantageous way to reduce your overall tax liability. When you lease assets to your corporation, the business pays a lease or rental payment and you in turn claim the lease or rental income. By doing this, you as the lessor get to deduct items such as acquisition interest, depreciation, repairs and maintenance, insurance and administrative costs.

When interest and depreciation deductions are exhausted you can then transfer the assets to a family member in a lower tax bracket or you can sell the assets to the corporation. A sale to the corporation would give it a higher tax basis (cost) than it had in the hands of the lessor (you). This would increase the corporation痴 depreciation deductions, thereby reducing its tax liability.

If you haven稚 noticed already, leasing assets to your corporation is a fabulous way to pull money out of the business instead of through payroll. When you take a paycheck, you致e got payroll deductions to consider. Not so when you take a rent check.

Another reason to lease assets to your corporation has to do with double taxation. If your corporation sells appreciable assets for a big gain, and you try and take the money out of the company, you will get clobbered with taxes?wice. This will not be the case if you lease the asset to the corporation. Under this scenario, you will only be taxed once.

From a legal standpoint, it痴 also better to have your corporation own as little assets as possible if you are in a 塗igh risk industry subject to lawsuits. If you lease assets to your corporation and your corporation gets sued, it痴 tough for a hostile party to seize the assets if they are in your name and NOT the corporation痴.

You may rent almost any asset to your corporation. Examples include, office space, machinery and equipment, vehicles, computers and peripherals and real estate.

Besides renting the assets personally, you may use a multiple entity arrangement such as partnerships, S corporations or limited-liability-companies to rent the assets to a corporation. However, you shouldn稚 use another regular corporation because it may be deemed a personal holding company (where most of its income is from passive income such as rents and royalties, etc.). Personal holding companies are subject to a penalty that would defeat any tax savings rental strategy.

The requirements for leasing assets to your corporation are as follows:

You must draw up a formal and bona fide lease agreement. You should treat the leasing agreement just like you would if you were dealing with an unrelated party.
The rental amount you establish must be fair. In other words, you can稚 charge anything you want. It has to be reasonable and in line with what痴 being charged for rental of similar assets in your area.
So there you have it, more good reasons to operate your business as a corporation. My final piece of advice is this: Make sure you consult with your attorney and tax advisor before making any important legal or financial decision. As with most things legal or tax-related, there are many exceptions and special rules that apply. Your attorney or tax advisor will be able to advise you correctly based on your own unique circumstances and objectives.

Great article and good advise. Our accountant and his partners own their own building and lease it back to the company our attorney same thing. Check with your accountant and legal team I'm sure their advise will be sound and will allow you to enjoy the benefits of working for yourself without the Red Flag

 

[davesl708]

I would go ahead and set money aside for your first IRS audit. That leasing game is a huge red flag.

My company has been leasing property, equipment, airplanes, rail cars, trucks, copiers and storage space for decades. Nothing the IRS gets to excited about.
As the former Director of Internal Audit for a large corporation I would be watching for high risk operations. The IRS looks at large leases or related leases for out of line fees and not much more.

 

[Handloader109]

If you are just starting out with this business, go get some goods tax advice. From other than here. Leasing back to yourself, uh, your Corp might not raise red flags, but you aren't a $10million Corp either.

 

[roadhunter]

You will be better off with two tractors. one business, one personal. You are on shakey ground mixing them together.

I would go ahead and set money aside for your first IRS audit. That leasing game is a huge red flag.

This happens all the time. It's hardly what you are making it out to be. Just got to play the game by the rules.

 

[bdog]

Don't know about NM but in Texas you have to pay property tax every year on all equipment owned by the business just like you pay property tax on a house. I too have an S Corp and I get to write a five figure check for business property tax each year on my equipment. Granted I get to write it off on fed taxes but the property tax bill hurts.

 

[jenkinsph]

Don't know about NM but in Texas you have to pay property tax every year on all equipment owned by the business just like you pay property tax on a house. I too have an S Corp and I get to write a five figure check for business property tax each year on my equipment. Granted I get to write it off on fed taxes but the property tax bill hurts.

In New Mexico you pay similar taxes to the county for business owned equipment. Just like any where else the OP will have to file gross receipts with NM taxation and revenue on a monthly basis. Don't forget to add the cost of paper work time to your pricing structure.

OP, a good accountant can help you decide how to best depreciate your equipment to your advantage. Since the accounting firm you use will likely represent you in an audit, I recommend you take their advice and follow their recommendations. One thing I have never felt works is home grown bookkeepers, not worth anything and seldom know the rules or abreast of changes in the laws. My best advice is to KEEP ALL RECEIPTS for all expenses you incur.

 

[alia176]

Good advice so far, thank you gents. To answer the fella who asked why the S corp, I created it primarily for my Engineering consulting business where I'm paying myself a salary. The tractor side of the business is something that I hope to dabble with. Since I'm making monthly payment on the darn thing, I was hoping to write off some of the expenses. I'll be looking into getting an umbrella policy for my S corp, hoping it won't break the bank!

Keep the good info coming as it'll help me others who have the same questions as me.

 

[LD1]

My truck, tractor, and trailer are all used for both personal and business.

You need to log hours on your tractor, and miles on your truck. And save ALL receipts.

At the end of the year, they take the total miles (or hours on the tractor) and figure the percentage of personal and business use. IE: you put 1000hrs on the tractor and can document and show 600 hours was for business....thats 60%. You can then claim 60% of the expenses. Fuel, repairs, etc. Same for the truck.

Allthough if you use a truck, most just take a mileage deduction. Saves on receipts. The mileage is meant to cover your fuel, repairs, insurance, maintenance, etc. I have a big diesel truck. 90% of the time it is either plowing snow or towing the trailer for business. I have found that with fuel, tires, repairs, insurance, etc I have more expense than the mileage allows for. So I itemize and save all my receipts.

Also consider the other implications of depreciating the tractor. If you depreciate it, (i dont remember what the term is) but lets use 5 years. And lets assume you paid 25k for it. You can depreciate 5k per year. But at the end of the year, the tractor is worth -0- in the eyes of the IRS. Now if you sell it for $15k......You have to show that $15k as profit.

 

[alia176]

My truck, tractor, and trailer are all used for both personal and business.

You need to log hours on your tractor, and miles on your truck. And save ALL receipts.

At the end of the year, they take the total miles (or hours on the tractor) and figure the percentage of personal and business use. IE: you put 1000hrs on the tractor and can document and show 600 hours was for business....thats 60%. You can then claim 60% of the expenses. Fuel, repairs, etc. Same for the truck.

Allthough if you use a truck, most just take a mileage deduction. Saves on receipts. The mileage is meant to cover your fuel, repairs, insurance, maintenance, etc. I have a big diesel truck. 90% of the time it is either plowing snow or towing the trailer for business. I have found that with fuel, tires, repairs, insurance, etc I have more expense than the mileage allows for. So I itemize and save all my receipts.

Also consider the other implications of depreciating the tractor. If you depreciate it, (i dont remember what the term is) but lets use 5 years. And lets assume you paid 25k for it. You can depreciate 5k per year. But at the end of the year, the tractor is worth -0- in the eyes of the IRS. Now if you sell it for $15k......You have to show that $15k as profit.

Great info, thank you. I *think* depreciation comes into play when the business owns the equipment and correct me if I'm wrong here. My leasing the tractor to the S corp, I don't think I'll be able to depreciate it but the monthly rental fee should help with the year end taxes. Again, I maybe misstating the facts here!

 

[davesl708]

Great info, thank you. I *think* depreciation comes into play when the business owns the equipment and correct me if I'm wrong here. My leasing the tractor to the S corp, I don't think I'll be able to depreciate it but the monthly rental fee should help with the year end taxes. Again, I maybe misstating the facts here!

You are correct. The lease is an expense.

 

[LD1]

The lease is an expense on the business. But an income on your personal stuff. Tax stuff is way more complicated than it needs to be, which is why its best to let a pro do your taxes when they start getting more complex like this. But on the surface, whatever your business pays YOU, I would think you need to claim as personal income. Then since the tractor is your "personal" tractor, on your personal taxes since you will be claiming income from the business for the tractor, you can deduct expenses and depreciation.