So you need a new car, truck or SUV for your business. Given today’s high cost and quick depreciation of vehicles, you may be wondering if a leased vehicle would be better for your bottom line, especially come tax time. It will, of course, depend on a number of individual factors, but here are a few thoughts that might help you lean one way or the other.
1. How long you intend to keep the vehicle? Do you trade in your business vehicle every year or two, keep it a few years or drive it until the wheels fall off? Facilitating a high turnover of your business vehicle or fleet is often more convenient when leasing. Monthly payments are generally lower, and you won’t have to focus on selling down the road. Simply return the vehicle to your dealer when the agreement is satisfied. Buying a vehicle, however, often allows you to get “more bang for your buck” over time by building equity and being able to deduct the vehicle purchase as well as interest on a business vehicle loan.
2. The number of miles you drive. If you drive more than 10 to 12 thousand miles per year (the general range in a standard lease deal), you could be charged extra fees on a leased vehicle for miles driven over the limit stipulated in the contract. For high-mileage drivers, it could make more sense to buy.
3. How much you want to spend on a monthly payment? While buying outright or financing a purchase loan allows you to build equity, lease payments are usually quite a bit less than the monthly cost of a car loan. Leasing can make sense for businesses with a strict monthly budget, as well as start-ups that need wheels on the ground without making a large initial investment.
4. Which tax scenario is more beneficial to you? Only a purchased vehicle can be claimed as a business vehicle deduction. When you retire that business vehicle, there may be a taxable gain due to depreciation, or a deductible loss. On a leased business vehicle, a deduction can be claimed on lease payments. It is important to note, if you use a luxury vehicle for business purposes, a “lease inclusion amount” reduces deductible lease payments. When you return your leased car to the dealer, regardless of make or model, there will be no taxable gain or loss.
5. Standard mileage rate vs. actual expenses. With both purchased and leased cars, you can deduct related expenses by using the standard mileage rate (58 cents per mile in 2019), or actual expenses. Actual expenses are defined as gasoline, oil, insurance, garage rent, parking and registration fees, lease or rental fees, repairs, tires - even loan interest - attached to business use. If you own a vehicle, you can choose the standard mileage rate the first year, then switch to actual expenses if it is more advantageous to do so. With a leased vehicle, you may also choose the standard mileage rate in the first year. You will not, however, be able to switch to the actual expense method in the second year for the duration of the lease.
Still not sure whether to lease or buy? Consult a financial or tax saving professional for clarification based on your set of circumstances.
Whether you decide to buy or lease, make sure the contract you enter into reflects, in no uncertain terms, your intentions. There has been at least one case where a business owner (who thought he had bought a work truck) lost his business vehicle deduction, then sued to prove otherwise. He lost his case after the court ruled the paperwork involved in the transaction was a lease - not a purchase agreement - based on a number of factors.
In any case, if you have questions or would like to discuss your buying versus leasing a business vehicle scenario in detail, call Tax Saving Professionals at 772-257-7888 or use our convenient Contact form to schedule an appointment. And remember, "It's your money, We'll help you keep it."