Some of the following sections deal with corporate vehicles. In a sole proprietorship, the vehicles used are treated in the same way a corporation treats nonbusiness use by a 5-percent shareholder or related person.

Vehicle Owned by Corporation

Compensation of an unrelated, non-shareholder employee should be increased by an amount equal to the fair market value of his or her personal use portion of a company vehicle as described in IRC section 280F. If this is the case, or if a like amount is reimbursed the employer, operating expenses are wholly deductible and depreciation is allowable at 100 percent of the maximum amount scheduled for the date acquired. If the value is not included in the employee's gross income however, the personal portion of its use is not considered to be qualified business use.

When a company vehicle is used by a 5-percent owner or a related person, as described in IRC section 267(b) the above exception does not apply and the personal use portion is never considered to be qualified business use. It is not uncommon to increase shareholder compensation or adjust his or her loan account based on personal auto use and also to deduct the full allowance for depreciation available for the period. More often, however, no additional compensation is computed and a constructive dividend can be assessed, equal to the fair market value of personal vehicle use, as well as an adjustment made to the expense accounts.

The safe haven policy prohibiting personal use except

commuting, is not available if the commuting employee

is an officer, director, or 1-percent owner.

Vehicle Owned by Shareholder

Monthly principal and interest payments for one or more vehicles owned by the shareholder (or sole proprietor) were often made by the company and deducted as auto expense. In one instance such checks, to BMW (Credit) were also listed in the purchase account. In the case of a corporation, the payments made on the shareholder's behalf constitute a constructive dividend, with the interest element subject to consumer interest deduction restrictions on the Form 1040.

Other auto expenses paid by the corporation, such as the cost of fuel, maintenance, accessories, insurance, and registration, are also made for the benefit of the

shareholder and are subject to partial or full disallowance depending on the extent of reimbursable

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