Business Vehicles... Should You Buy Or Lease?

If you are considering purchasing a car for business, you should know that there are often more tax breaks for leasing the car than there are for actually purchasing the car. According to the Tax Code, any passenger automobile that costs more than $30,000 is considered a luxury car and is subject to the "luxury car" rules. Luxury car rules limit the amount of depreciation you can take on a vehicle you own. However, on a leased car, the rules are much more lenient.

For example, you buy a $30,000 car and use it 70% for business. Your business use would entitle you to $21,000 worth of depreciation deductions and accelerated depreciation would allow you to take that $21,000 write-off over six years. However, under luxury car rules, your depreciation deductions are capped at $12,730 ($2,122 a year). You may have to keep your car another four years, a total of ten years, to get the full write-off.

Now let's say you lease a $30,000 car and use it 70% for business. When you lease a car, you write off the business use portion of your monthly lease payments. Because lease payments are built around the anticipated depreciation in the car's value during the lease term, you can lease a car for $500 a month and deduct $350 a month (based upon 70% business use factor) which amounts to $4,200 a year. In this sense, you are essentially deducting part of the car's depreciation and dodging the luxury car rules. Leasing allows you to get the full write-off in five years. Assuming a combined tax bracket of 40% you save enough for a substantial IRA. After an IRA deduction, you save another $680. Now you have tax savings of $2,380, roughly $200 a month to fund the IRA!

When leasing a car, you must first make sure your agreement is actually considered a lease and not a conditional sales contract. In order for the agreement to be considered a lease, your intent at the time you sign the lease is to keep the vehicle for the term of the lease, then turn it back in. The difference is that the conditional sales contract requires depreciating the asset using the contract price as the cost, while in a lease the taxpayer must deduct the lease payments instead of depreciating the asset.

Leasing a car offers more benefits than just larger deductions:

• If you are an employee and you lease a car, the finance charges are included in the monthly payment. If you buy the car, however, the interest you pay on the car loan is not usually deductible. If you are deducting 70% of your lease payment, you are really deducting 70% of your interest as well.
• You can avoid some tax problems by leasing a car. A trade-in makes it more unlikely that you will recover full costs of the car. Because you already are deducting part of the lease payment, leasing saves you more money on the trade-in. If you want to get rid of the car, selling it to an unrelated party is better than trading it in because you will likely get a tax loss that you can deduct.
• If, as part of your lease agreement, you are required to make an up-front payment, that payment may be deducted over the duration of the lease.
• You can deduct a part of your business-related expenses for gas, insurance, repairs and other costs that go beyond your monthly lease payments.

For more information call Geoff at:

Freeman and Company are Public Accountants with decades of tax practice and financial guidance experience and over 450 clients and businesses nationally. Call Geoffrey for an initial consultation today!