In today’s marketplace, many opportunities exist for leasing or buying a car, truck and SUV. But deciding which way to go is not as easy as flipping a coin. Careful planning with a tax professional can yield cost-saving benefits, more efficient business operations and, in some cases, a healthy tax write-off to boot.
By example, let’s say you’re a successful businessperson — a banker, broker or bottle maker. First impressions count, as in the case of driving in a shiny new car every two or three years in order to impress current clients as well as attract new ones. A real estate agent is an example of someone who uses their car or SUV to carry prospective clients from location to location. If this sounds familiar, it might indicate you’re a good candidate for leasing.
But what if you’re the owner of a plumbing or electrical company with a fleet of trucks on the road at least five days a week? Chances are good you’ll get many years of useful life from the vehicles, which will rack up extensive mileage on the road. Typically, you’ll exceed the mileage limits of a lease, resulting in additional charges. If the idea of taking a major hit at the end of the lease term doesn’t excite you, this might indicate you’re better off buying.
Regardless, there are these and many other factors to consider before signing on the dotted line.
Mileage or Value?
If you’re like us, with a case of Automotive Attention Deficit Disorder (Auto A.D.D.), and enjoy a new car every three years, leasing may be for you. Leases typically involve a down payment, a fixed monthly lease amount and a restriction on mileage per year for the term of the lease. A substantial down payment will help drive down the cost of the monthly payments over the lease term. Depending on the popularity of a particular model, there may be smaller or even no down payments at lease inception. Those lease payments are typically more affordable, offering the opportunity to drive a nicer vehicle, even if it’s for a shorter period. Finally, the car will usually be covered by a full warranty during the lease period.
If high-mileage use is a fact of life for your business, buying might be the way to go. With that in mind, be prepared for higher monthly payments, a warranty that only carries you through the first several years of ownership, and no mileage restrictions. After the vehicle is paid off, it can be sold outright or used as a down payment for your next purchase (or lease). Be aware, though, that once the warranty has expired, you’ll be responsible for maintenance beyond that period.
The Taxman Still Cometh
Yes, the taxman does cometh, but if you plan properly you can realize some savings while using your vehicle for business. Carl Gadinsky, of the international CPA firm Morrison, Brown, Argiz and Farra LLC, headquartered in Miami, Florida, discussed with Autotrader when a business might consider leasing, or buying a vehicle instead. “Depending on mileage, leasing might be for you,” he said. “Monthly payments are smaller, allowing you to afford a nicer vehicle. If it’s used exclusively for business, you can expense all the costs associated with the lease: the monthly payments, gas, maintenance, etc. If it’s used partly for business use, that percentage used is fully deductible for tax purposes.” For example, if your business accounts for 80 percent of the vehicle’s use, you’ll be able to claim a deduction for 80 percent of the car’s lease expenses. Mileage also comes into play as a means of offsetting the expenses of monthly payments. Currently, the allowable rate is 54 cents per mile.
Buying a car or SUV is similar in the sense that buying will cover the percentage of the purchase price that coincides with the business versus personal use and covers associated gas and maintenance expenses. “If you buy, you might be able to depreciate all of it in the first year. Also, depending on the vehicle weight, larger SUVs are eligible for up to $25,000 in depreciation in the first year,” Gadinsky stated.
Why Would a Small Business Buy a Truck or Fleet of Trucks?
Cars and trucks have different tax-based schedules. “With cars and SUVs, we find they’re generally used for a combination of personal and business use. As a result, you can only write off a percentage of the vehicle depreciation each year.”
“Trucks will most likely be used 100 percent of the time for business, whereas a car or SUV might see split duty as a personal and a business vehicle,” said Gadinsky.
When asked why a business might buy a truck rather than lease it instead, he offered the possibility of other benefits. “You could take a larger depreciation write-off in the first year than the lease payments made during that same time period. But that may be just a one-year thing. If you were able to write it all off in the first year, you won’t necessarily have any write-off left for years two or three. The process may come with a big benefit up front, which might disappear later.”
Business tax specialist Joe Handy of Joseph P. Handy CPA in North Miami, Florida offers a slightly different opinion that assumes a 100 percent business use of a vehicle. “Buying it will represent a larger up-front tax deduction for the first year, through depreciation and special expensing provisions in the law,” said Handy. “Leasing typically results in a uniformed, systematic tax deduction equal to the monthly lease payment throughout the life of that lease. In considering a $1000-per-month lease payment, it represents a $1000-per-month tax deduction for the life of the lease ($36,000), while the purchase of a $90,000 vehicle used for business might represent a $90,000 deduction in the first year,” he said. In essence, buying the vehicle and depreciating it in the first year “front-loads” the tax deduction.
It’s a Cat-and-Mouse Game
There’s a “6,000 pound rule” that assumes only businesses, farmers, truckers and others with heavy equipment would be the ones using a heavy vehicle that exceeds that Gross Vehicle Weight Rating (GVWR). At the same time, with SUV owners demanding more vehicle capabilities like 4- or all-wheel drive, luxury SUVs have been getting heavier, easily pushing them beyond the 6,000-lb threshold for heavy vehicles. Perceptive SUV buyers realized a benefit to this weight gain, and vehicle sales boomed, putting those buyers in line for an immediate tax deduction. The Internal Revenue Service countered with a rule that now excludes most sport utility vehicles from that large up-front depreciation write-off.
It’s Not a One-Size-Fits-All Proposition
As always, the economics of leasing or buying the car should be of primary importance. The tax deduction should not be the first consideration. “Don’t let the tail wag the dog,” said Handy. “If a steady lower monthly payment is more important to you and your business, rather than the up-front outlaying of cash, then leasing is for you,” he continued. “If you’re more concerned about maximizing tax benefits, then you’re a candidate for buying.”
Regardless, discussing your options with a tax professional is probably the first place to stop before finally hitting the dealer showroom.