An S corporation is going to purchase a car that is going to be used around 80% for business. Does the S corporation depreciate only 80% of the car?

I am the sole owner and employee of an S corporation, which is going to purchase a car. The car will be used around 80% for business. Does the S corporation depreciate only 80% of the car or 100%? As an employee using the car, do I expense a percentage of car-related expenses and pay the company a fair value for use of the car (20% of the going lease rate)?

For starters, because you will be using the car for business 80% of the time, that is the percentage you will be able to depreciate. There is no deduction for the personal use of an auto of any kind.

With regard to depreciating the auto and then deducting actual expenses for using the car, this is called "double dipping" and is not legal.

The IRS allows self-employed business owners to use the mileage allowance for up to four vehicles used simultaneously, whether owned or leased. The mileage allowance is an alternative to deducting depreciation or lease payments plus operating costs, such as for gas, maintenance, repairs, insurance, and registration. Parking fees and tolls on business trips are deductible in addition to the allowance. Parking at your regular office and tolls en route to the office are nondeductible commuting expenses.

An advantage of the mileage allowance is that you do not need to maintain records of actual operating costs, but records showing business mileage and business purpose for the trips must still be kept. A disadvantage of the allowance is that it generally provides a substantially lower deduction than claiming operating costs plus depreciation or lease payments.

If you want to use the IRS mileage allowance, you must do so from the first year that the vehicle is placed into business service. If, for the first year, you claim operating expenses and modified accelerated cost recovery system (MACRS) depreciation (if you own the vehicle) or lease payments, the allowance may not be used for any later year. If you buy a new vehicle and use the IRS mileage allowance, you can continue to use it in later years or you may switch to deducting actual costs, but any depreciation deduction must be based on straight-line depreciation over the remaining estimated useful life. If you lease a business car and claim mileage allowance, you must continue to use the allowance for the entire lease period.