As an investor, you have probably already decided on the form of corporate entity to use. Now you have determined that you will be using a vehicle in your business more and more. We constantly get phone calls asking which is a better buying or leasing a vehicle. In this article we attempt to give the pros for each.
Reasons to Buy
The standard mileage rate can be used in the first year an owned auto is placed in service and switch to the actual expense method in a later year if it becomes more beneficial. The standard mileage rate can be used in the first year of a lease but must be used through the term of the lease.
Owning a vehicle is advantageous for taxpayers who intend to keep it more than four years, or until it is ready for the junkyard.
If a vehicle is going to be driven more than 15,000 miles ownership is better. A majority of lease contracts have a 15,000-mile limit with an 8 cent to 15 cent charge for every excess mile.
If a taxpayer has cash for the purchase or down payment and the car is not subject to luxury auto rules then ownership is the way to go.
Reasons to Lease
A lease provides lower monthly payments and little or no money down. This leaves a business owner with more capital to invest in the business. Monthly lease payments usually average about one-third less than loan payments on the same vehicle.
Calculating deductions on a leased auto is much easier than calculating allowable depreciation.
Taxpayers who trade in their business auto every two or three years usually end up with a realized loss that they cannot deduct. The basis usually exceeds the trade in value. This can be avoided with the use of Section 1031, like-kind exchanges.
Individuals who desire a high-priced vehicle find leasing the better alternative. Tax advantages of leasing over buying increase with a car’s value and percentage of business use. Leases provide more car for less money.
In the case of leases, interest is included in the lease payments and is therefore 100% deductible. Interest is not 100% deductible for individuals who purchase their vehicles.
“Tax Tips” are the opinions of Executive Accounting Solutions, which is not a substitute for individual accounting, tax, and professional services since individual situations vary.