Buy or Lease Your New Business Vehicle?

Tax Tips

Recently I had dinner with friends who run a business. The table conversation turned to buying new cars.  Finally the buy versus lease question was asked of me…the so called tax expert. As always, I don’t answer any tax questions until I have time to double check the changing tax law. To answer their question, I told them to keep an eye out for my latest blog.  So Jeff, here it is!

As with most decisions in life, taxes should only be one of the considerations. Here are a few of the non tax considerations on buying or leasing a business vehicle:

1) Number of miles your drive each year (leased cars- often charged extra fees for miles driven over 10,000 or 12,000/year)

2) How long you keep a car (get a new car every 3-4 years or keep it until its junk)

3) How much do you want to spend on your monthly payments (lease payments are usually quite a bit less than monthly payments on car loan)

Now let’s talk about the tax benefits for the self-employed taxpayer and his car used for business. With both purchased and leased cars, you can deduct the related expenses by using the standard mileage rate or actual expenses.

Note: If you own the vehicle, you can choose the standard mileage rate in the first year and switch to the actual expense method in a later year if it becomes more favorable. If you lease a vehicle, you may also choose the standard mileage rate in the first year but once you use the standard mileage rate you must use it for the life of the lease.

With the standard mileage rate, your business mile deduction will be based on 54 cents per mile for 2016 (down from 57.5 cents in 2015). You can also deduct business related parking fees and tolls. For the purchased vehicle, you may also be able to deduct a portion of the interest on your car loan.

Under the actual expense rules, for both leased and purchased vehicles, you can deduct the business percentage of your gasoline, oil, insurance, garage rent, parking & registration fees, lease or rental fees, repairs, tires, loan interest, etc.

Here is where the expenses differ between purchased and leased vehicles using the actual expense rules.

Now let’s talk about leased vehicles. Since you don’t own the car, you can’t depreciate it but here’s the good news! You can deduct the business percentage of your lease payments. So if your yearly lease payment is $4,200 ($350 / month) and your business use percentage is 80%, you may be able to deduct $3,360 on your tax return for that year. There is one hitch. Since the tax code limits the depreciation on “luxury” cars, it also limits (to a very small degree) lease payments on such a car. It’s called a “lease inclusion amount” and it reduces the deductible lease payments. The higher the original value of the car, the greater the amount.

As the price goes up on the car, leasing usually becomes more preferable. But don’t forget if you purchased the vehicle, you can also deduct the interest on the vehicle’s loan based on the percentage of business use.

If you purchased a car this year to transport passengers like for Uber and Lyft and you bought a sports utility vehicle, you may be able to deduct up to $25,000 of the cost of the vehicle if you use it more than 50% for your business.  If you purchased a car for your business you may also be able to deduct up to the depreciation deduction allowed if your business use is more than 50%.

There is one more difference between buying and leasing a business vehicle. That difference is the disposition of the vehicle. When you dispose of a business vehicle that you own, there may be taxable gain or deductible loss. The portion of any gain that is due to depreciation will be taxed as ordinary income. When you return your leased car to the dealer, there is no taxable gain or loss.

Don’t worry about knowing the tax laws related to business use of your car.  TurboTax will ask you simple questions about your business and give you the tax deductions you are eligible for.

 

 

Comments (10) Leave your comment

  1. Can someone tell me if I can deduct the down payment on our leased business car? We were required to put 5K down. I’m not sure if this would be concidered a “pre-payment”, or if I should include this amount with the lease payments or if there is somewhere else I should enter it (on Turbo tax)

  2. Employee deductions are different from the deductions a business owner would take. For example, a pool cleaning business can expense the truck necessary for cleaning pools. However as an employee, you probably need a vehicle to commute to and from work. Since personal expenses like vehicles and homes cannot be deducted, I would consider the car a personal necessity.

    As the employer is already taking a deduction, I would avoid double dipping.

  3. My husband is an employee at a car dealer, he is required to lease a BMW and company pays part of his lease payment. Can we take a tax deduction for this vehicle?

  4. I am a licensed family child care provider and am trying to decide whether to purchase or lease a vehicle..looking at this it seems that leasing makes a LOT more sense since it will ONLY be for business use. I also want to be sure I am correct, the payment percentage is a write off as well as the mileage and insurance on a leased vehicle.

  5. I am not experiencing any trouble, the text is nicely in the middle of the screen. Have you checked your screen settings, perhaps there is something wrong in there?

  6. I don’t know whether it’s just me or if everybody else experiencing problems with your site. It appears as though some of the text in your posts are running off the screen. Can someone else please comment and let me know if this is happening to them as well? This might be a issue with my web browser because I’ve had this happen previously. Cheers
    First off I would like to say awesome blog! I had a quick question that I’d like to ask if you don’t mind. I was interested to find out how you center yourself and clear your thoughts before writing. I’ve had a tough time clearing my thoughts in getting my thoughts out there. I do enjoy writing but it just seems like the first 10 to 15 minutes are generally lost simply just trying to figure out how to begin. Any ideas or tips? Thanks!

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