I am often asked by clients who use their car for business whether it is better to lease a car or to buy it outright.
When making this decision one must first consider the financial aspects before looking at the tax consequences. Remember, the primary criteria for evaluating any transaction, strategy or technique should always be financial. Taxes are second.
FINANCIAL CONSIDERATIONS:
Lease payments include an interest factor, often at a higher rate than if you purchased the car using an auto loan or home equity borrowing. However, leasing will often allow you to get a more expensive car for less money down and a lower monthly payment than if you purchase and finance the car.
Several factors, specific to your individual situation, play a part in the decision – such as how long you plan to keep the car and how many miles you drive in a year. Most lease agreements will limit you to 12,000 or less miles per year, with additional charges for excess miles.
If you plan to get a new car every three or four years, and you generally drive less than 12,000 miles per year, leasing may be the better option. If you will keep the car for seven or more years, and you generally average 20,000 miles per year, it may be “more better” to buy.
As usual, there are several online tools to help you with your decision. Edmunds.com has a Decision: Buy Vs Lease Calculator, as well as other related calculators, and the Chrysler Financial site has a Lease Vs Buy questionnaire.
TAX CONSIDERATIONS:
You have two options when it comes to deducting the business use of an automobile, whether you buy or lease. You can claim the “standard mileage allowance”, 48.5 cents per mile for 2007, or you can deduct the actual cost of operating the car for the year (gas and oil, insurance, maintenance and repairs, license and registration fees, AAA membership, depreciation or lease payments, etc) multiplied by your “business use percentage”. As with any tax situation where you have more than one option for claiming an item, you should calculate your deduction using both methods and choose the one that provides the greatest net federal, state and local tax savings.
In order to claim the standard mileage allowance you must elect to do so in the first year the car is placed in service (the year you purchased or leased the car, or the first year you used the car for business if later). If you claim the standard mileage rate in the first year you can switch to actual expenses in a later year - but if you claim actual expenses in the first year you may not be able to change over to the standard mileage allowance in later years. You can not switch methods on a leased car. If you choose to claim the standard mileage allowance on a leased car in the first year you must use this method for the entire period of the lease.
If you use the standard mileage allowance there is really no difference – you get the same tax deduction whether you own the car or lease it. If you drive 10,000 miles a year for business you can deduct $4,850.00 on your 2007 Form 1040 if you own the car, and $4,850.00 if you lease the car.
If you choose instead to deduct the actual expenses you will probably get a bigger tax deduction if you lease the car. The more expensive the car and the higher the business use percentage the greater the additional deduction. This is because of the difference between the allowable deduction for depreciation and that for lease payments.
Depreciation deductions are limited under the “luxury car” rules. The IRS considers a car costing more than $14,800 to be a “luxury car” (no – I am not kidding). For basic passenger cars placed in service in 2007, the first-year depreciation deduction, and the Section 179 deduction, for 100% business usage is limited to $3,060. The second-year limit will be $4,900, the third-year limit $2,850, and for each later year the limit will be $1,775. These numbers must be multiplied by your business use percentage.
Trucks, vans, SUV’s, electric and clean fuel vehicles have higher annual depreciation limits, and trucks, vans and SUV’s rated at more than 6,000 pounds “loaded gross vehicle weight” are exempt from the luxury-auto dollar limitations.
The deduction for lease payments must be reduced by a “lease inclusion amount” based on the fair market value of the car. However, even after adjusting for the lease inclusion amount the net deduction for lease payments will generally be much higher than the equivalent amount of depreciation allowed – especially for more expensive vehicles. The lease inclusion tables for 2007 are included in IRS Revenue Procedure 2007-30.
Self-employed individuals deduct the business use of their car on Schedule C. Employees who use their car for business report the deduction on Form 2106 (Employee Business Expenses), or Form 2106-EZ, and carry the net amount over to be claimed as a miscellaneous deduction on Schedule A, subject to the 2% of AGI limitation. Miscellaneous deductions for employee business expenses are not allowed in calculating the dreaded Alternative Minimum Tax (AMT). So if you are a victim of AMT you will get no tax benefit, or a limited one at most, from deducting business usage of your car as an employee, regardless of whether you own or lease.
In the case of a hybrid vehicle that qualifies for the energy credit, you will only be able to claim the credit if you purchase the vehicle. You will not qualify for the credit if you lease.
Any questions?
TTFN
When making this decision one must first consider the financial aspects before looking at the tax consequences. Remember, the primary criteria for evaluating any transaction, strategy or technique should always be financial. Taxes are second.
FINANCIAL CONSIDERATIONS:
Lease payments include an interest factor, often at a higher rate than if you purchased the car using an auto loan or home equity borrowing. However, leasing will often allow you to get a more expensive car for less money down and a lower monthly payment than if you purchase and finance the car.
Several factors, specific to your individual situation, play a part in the decision – such as how long you plan to keep the car and how many miles you drive in a year. Most lease agreements will limit you to 12,000 or less miles per year, with additional charges for excess miles.
If you plan to get a new car every three or four years, and you generally drive less than 12,000 miles per year, leasing may be the better option. If you will keep the car for seven or more years, and you generally average 20,000 miles per year, it may be “more better” to buy.
As usual, there are several online tools to help you with your decision. Edmunds.com has a Decision: Buy Vs Lease Calculator, as well as other related calculators, and the Chrysler Financial site has a Lease Vs Buy questionnaire.
TAX CONSIDERATIONS:
You have two options when it comes to deducting the business use of an automobile, whether you buy or lease. You can claim the “standard mileage allowance”, 48.5 cents per mile for 2007, or you can deduct the actual cost of operating the car for the year (gas and oil, insurance, maintenance and repairs, license and registration fees, AAA membership, depreciation or lease payments, etc) multiplied by your “business use percentage”. As with any tax situation where you have more than one option for claiming an item, you should calculate your deduction using both methods and choose the one that provides the greatest net federal, state and local tax savings.
In order to claim the standard mileage allowance you must elect to do so in the first year the car is placed in service (the year you purchased or leased the car, or the first year you used the car for business if later). If you claim the standard mileage rate in the first year you can switch to actual expenses in a later year - but if you claim actual expenses in the first year you may not be able to change over to the standard mileage allowance in later years. You can not switch methods on a leased car. If you choose to claim the standard mileage allowance on a leased car in the first year you must use this method for the entire period of the lease.
If you use the standard mileage allowance there is really no difference – you get the same tax deduction whether you own the car or lease it. If you drive 10,000 miles a year for business you can deduct $4,850.00 on your 2007 Form 1040 if you own the car, and $4,850.00 if you lease the car.
If you choose instead to deduct the actual expenses you will probably get a bigger tax deduction if you lease the car. The more expensive the car and the higher the business use percentage the greater the additional deduction. This is because of the difference between the allowable deduction for depreciation and that for lease payments.
Depreciation deductions are limited under the “luxury car” rules. The IRS considers a car costing more than $14,800 to be a “luxury car” (no – I am not kidding). For basic passenger cars placed in service in 2007, the first-year depreciation deduction, and the Section 179 deduction, for 100% business usage is limited to $3,060. The second-year limit will be $4,900, the third-year limit $2,850, and for each later year the limit will be $1,775. These numbers must be multiplied by your business use percentage.
Trucks, vans, SUV’s, electric and clean fuel vehicles have higher annual depreciation limits, and trucks, vans and SUV’s rated at more than 6,000 pounds “loaded gross vehicle weight” are exempt from the luxury-auto dollar limitations.
The deduction for lease payments must be reduced by a “lease inclusion amount” based on the fair market value of the car. However, even after adjusting for the lease inclusion amount the net deduction for lease payments will generally be much higher than the equivalent amount of depreciation allowed – especially for more expensive vehicles. The lease inclusion tables for 2007 are included in IRS Revenue Procedure 2007-30.
Self-employed individuals deduct the business use of their car on Schedule C. Employees who use their car for business report the deduction on Form 2106 (Employee Business Expenses), or Form 2106-EZ, and carry the net amount over to be claimed as a miscellaneous deduction on Schedule A, subject to the 2% of AGI limitation. Miscellaneous deductions for employee business expenses are not allowed in calculating the dreaded Alternative Minimum Tax (AMT). So if you are a victim of AMT you will get no tax benefit, or a limited one at most, from deducting business usage of your car as an employee, regardless of whether you own or lease.
In the case of a hybrid vehicle that qualifies for the energy credit, you will only be able to claim the credit if you purchase the vehicle. You will not qualify for the credit if you lease.
Any questions?
TTFN
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