My Company tracks the use of all company vehicles and whether the mileage is for business or personal use. The business use mileage of the vehicles is clearly "qualified business use" for the purposes of the "business use percentage" as it relates to depreciating the vehicle as listed property per Publication 946. The personal use mileage was also all considered as "qualified business use" as per 26 U.S. Code ? 280F(6)(C)(i)(III), as explained in Publication 946. We met the conditions of this clause through valuing the personal use mileage according to 26 CFR 1.61-21, as explained in Publication 15-B, and reporting it as a fringe benefit. Specifically, the proportionate fringe benefit value is included in each employee's gross income and income tax is withheld.

This resulted in us reporting that 100% of all company vehicles' use was "qualified business use" and so the "business use percentage" on Form 4562, Part V, was entered as 100%. This was accurate and resulted in fair taxation when all company vehicles were used by employees that were not "more than 5% owner." We depreciated the value of the vehicles and was able to claim the depreciation as a deduction while the correlating fringe benefit value to the employee was reported as part of income and had all applicable taxes withheld/remitted.

However, this does not appear to result in fair taxation when one of the employees is a "more than 5% owner." Under this circumstance, 26 U.S. Code ? 280F(6)(C)(i)(II), as explained in Publication 946, states that "the use of property as pay for the services of a 5% owner or related person" is not included as a "qualified business use." This means that, irrespective of whether or not the value of the personal use of the vehicle is reported as part of the 5% owner's gross income, with income taxes withheld, we are not able to claim that percentage as a "qualified business use." The resulting impact is that the "business use percentage" for the vehicle used by the 5% owner will be less than 100% when reported on Form 4562, Part V. Because of this, we will be able to depreciate a smaller amount for the respective year, and so claim a smaller deduction from taxes. At the same time the 5% owner will be paying all wage related taxes on the value of the fringe benefit as the value is still reported as part of gross income for the 5% owner. Essentially, the company will be paying income tax and the employee will be paying income tax on the same monies.

This results in the following question:

Is our above understanding accurate and how should this be best handled so as to result in fair taxation for both the company and the 5% owner?

It is our hope that it is as simple as overlooking a clause in the IRC whereas the company does not need to report the value of the personal use of the vehicle as part of the 5% owner's gross income. Alternately, maybe there is a clause or other case law overlooked allowing the use of property as pay for the services of a 5% owner when the total gross income for that owner is less than a certain dollar amount.