By: Hardeep Singh
Here are a few non-tax considerations while buying or leasing a business vehicle:
- Number of miles you drive each year: leased cars often charge extra fees for miles driven over 10,000 or 12,000/year
- How long you keep a car: do you get a new car every 3 or 4 years or keep it for a longer time?
- How much do you want to spend on your monthly payments: lease payments are usually much less than monthly payments on car loan.
With purchased and leased cars, related expenses can be deducted by using the standard mileage rate or actual expenses. 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 the vehicle is leased, one can 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 53.5 cents per mile for 2017 (down from 54 cents in 2016). 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.
Some expenses differ between purchased and leased vehicles using the actual expense rules. Because you don’t own a leased vehicle, you can’t depreciate it. But 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 preferable. But 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 for self-employment jobs like 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.
Whether you lease or buy a car for your business depends on cash flow, mileage, and other issues that are specific to your business. Spend the time to research both options before deciding, and obtain advice from your tax counsel.