Consultant’s Corner: Business Vehicle Asset Transfers
Q. I am looking to pledge my truck into my existing LLC. What should I do next?
We do not know the details of your LLC and its tax status or your business use of the truck, but our response assumes that your LLC is a single member LLC taxed as a sole proprietorship and that your truck is a mixed use vehicle, or a vehicle used for both business and personal purposes.
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Whether to transfer ownership of a mixed use vehicle to your business will depend on all the facts and circumstances. For example, unless your business use of a vehicle is significant (80% or more), having your company own or lease the vehicle would provide little tax benefit regardless of how the business is structured. Also, having your company own or lease vehicles used in the business can provide you with added legal protection from claims arising from the business use of the vehicles, but the risks associated with using a personally owned or leased vehicle for business activities can be minimized with a non-owned auto rider on the business liability insurance policy. Though not an exhaustive analysis, the following are some of the important considerations when transferring personally owned assets to a business entity (corporation, LLC, etc.).
Tax considerations
Whether a vehicle is owned or leased by your company or by you, the expenses associated with the personal use of the vehicle—based on mileage driven for non-business purposes—are not deductible by the company as business automobile expenses. While your company could pay for all of the expenses associated with a company owned or leased vehicle that you drive, with your company structured as a single member LLC taxed as a sole proprietorship, company payments for expenses associated with your personal use of the vehicle will be considered nondeductible draws by you of the business profits.
From an accounting standpoint, using a company owned or leased vehicle for personal purposes creates an administrative burden for the business, because you need to allocate your operating expenses between business and personal use. At the very least you would need to perform this allocation annually, but for estimated tax purposes it would be advisable to do so on at least a quarterly basis. Also, allocating expenses more frequently would provide you with a better picture of your operating results throughout the year.
Asset transfers
Transferring personally owned assets to a business entity typically involves formally transferring title to the assets and any liabilities associated with those assets to the entity. This is usually accomplished through a sale and purchase transaction, but there are two methods by which to accomplish these transfers—capital contributions or a sale and purchase—and the paperwork will differ accordingly.
With capital contributions, you contribute the assets to the entity in exchange for ownership (shares of stock for a corporation or membership certificates for an LLC). Under IRS rules, this can generally be done on a tax-free basis if you are immediately in control of the entity (own at least 80% of the entity’s outstanding ownership interests) following the exchange.
With a sale and purchase, you sell the assets to the entity and document the transaction with a bill of sale. Generally speaking, you would sell the assets to the entity at their fair market value, but bargain sales ($1.00 for example) are a frequently used practice for transferring assets to or between entities. However, bargain sales can have long-term tax implications for the business, particularly when transferring depreciable property like buildings, equipment and vehicles.
While it’s possible for business owners to transfer property and associated liabilities to a business entity they own, particularly in exchange for an equity interest when the business is formed, the entity structure, type of asset, existing liabilities, timing of the transfers, and other factors can have income tax and other financial implications. For example, transferring personally owned property with an outstanding loan or loans to a business entity in exchange for an ownership interest in the entity or for other reasons may result in a taxable gain if the loan or loans on the property exceed your adjusted basis in the property. Also, if the property has a mortgage, the mortgage will likely have an alienation or due on sale clause. A due on sale clause prevents the borrower from transferring ownership of the property without the permission of the lender. If the property is transferred without the lender’s permission, and the lender discovers the transfer after-the-fact, the lender could call the loan. Calling the loan would make it immediately due and payable, which would force you to refinance the loan, assuming you couldn’t pay it off, under a revised risk scenario and possibly a higher interest rate.
Insurance considerations
Again, we don’t know your business use of the truck, but a commercial auto policy or a non-owned auto rider on your business liability policy may be necessary depending on the ownership and the business use of the vehicle. If the company owns or leases the vehicle, then a commercial auto policy with the company as the “named insured” is advisable, particularly if the company operates under a business entity and employees, including owner-employees, will use the vehicle. If employees, including owner-employees, use their personally owned or leased vehicles in the business, then a non-owned auto rider is generally appropriate. Even with a non-owned auto rider on your business policy, employees, including owner-employees, should have personal auto policies with a commercial use endorsement or rider. Such an endorsement in effect includes the company as an insured party without being a name insured. Without the proper endorsement, a vehicle involved in an accident while engaged in company business may not be covered by personal auto insurance. Also, many individuals carry personal supplemental liability insurance, particularly to cover high risk activities. You can review information on business and personal auto policies at the following websites:
http://www.iii.org/article/do-i-need-commercial-auto-insurance-policy
http://www.entrepreneur.com/management/insurance/typesofinsurance/article44362.html
Professional assistance
Transferring personally owned assets to an existing business entity can be a fairly complex process depending on all the facts and circumstances—transfer method, existing loan(s), etc.; therefore, we recommend that you consult your lawyer and tax advisor for assistance with the transfer process and paperwork and to thoroughly evaluate the tax consequences of the transfer.
