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AUTOS: LEASING VS BUYING

      Autos: Leasing Vs Buying         

Okay, so you opened the newspaper this morning and there splashed on the back page is an ad for a brand new Mercedes.  It's red.  It has leather seats.  The dream car you never thought you could afford now has a lease payment of "only" $699!  Should you bite?

 

Actually, we get asked this question a lot and, surprisingly enough, the answer is a definite ...well...maybe!  There are a lot of "if's" involved in that decision.  IF you've already gone head over heels over the car and are determined that you're going to have it and IF you use the car for business, then it may actually be advantageous for you to lease instead of buy a luxury auto.

 

 The reason that leasing is advantageous is because depreciation expense is limited for luxury automobiles.

That's actually surprising to many of our clients and keep in mind that this applies only to luxury autos.  The reason that leasing is advantageous is because depreciation expense is limited for luxury automobiles.  If you buy that $70,000 auto, the amount of depreciation you can take on the vehicle (for business use) is limited to $3,160 for the first year; $5,100 for the second year;$3,050 for the third year; and $1,875 for every year thereafter.

There are, however a number of caveats to the general rule.  If you drive more than 12,000 miles per year, there can be some fairly serious additional charges with a leased vehicle.  Also, look carefully at the up front payment you may be required to make.  Some of these "low" lease payments on luxury cars aren't quite so low when you factor in the "down payment."  Also, the above scenario only works if you are the type that wants to drive a car for just a couple of years and then trade for a new one.

Ordinarily, with a purchased vehicle, you may use either the "mileage" or the "actual expense" method to figure your vehicle expense. However, when leasing, you may only use actual expenses. Of course, you still have to maintain mileage logs to determine what percent of the actual expenses you will be able to deduct.

Also, when you lease a car, even if you use the car 100% for business, there is a mandatory "lease inclusion cost " that must be deducted from your deductible lease payments.  While this can be a detriment to leasing, the inclusion cost generally isn't enough to offset the advantage when leasing a luxury vehicle.

Most of the deductible items under the "actual expense" method are the same whether you buy or lease:

  • Fuel
  • Repairs and maintenance
  • Insurance
  • Taxes and licenses

However, when leasing, you are entitled to deduct the lease payments less the inclusion amount.  If you borrow the money to buy the car, you are allowed to deduct the interest portion of your loan provided that you are self-employed

To illustrate our point above, let's use an example.  John Doe is self-employed and has the option of buying or leasing a $50,000 automobile which he uses 100% for business and will drive for 2 years before trading in.  If we further assume that he has to make a $5,000 down payment on the loan or a $2,000 down payment on the lease and the car will be worth $30,000 at trade-in, we get the following results:

His total out of pocket cash under each scenario (ignoring fuel, insurance, etc which would be identical under both scenarios) is as follows:

LEASE


BUY


Down payment $2,000 $5,000
Lease payments (24 payments of $883 based on a 24 month lease at 3%) $21,200
Loan payments (24 payments of $733 based on 60 month loan at 3%)

 

$17,600

 

     Total out-of-pocket ignoring taxes

 

$23,200

 

$22,600

 

Tax effect:
Deductible lease payments less an inclusion amount of $911 $20,289
Deductible interest expense $2,600
Depreciation expense

 

$8,260

 

     Total deductions

 

$24,289

 

$10,920

 

Total out-of-pocket above $23,200 $22,600
Cash saved on tax deductions at 33%

 

$(8,015)

 

$(3,604)

 

     Total Net Cost Of Vehicle $15,185 $18,996

As you can see, the difference isn't huge but, there can be a small advantage to leasing luxury autos (as apposed to borrowing the money) in certain circumstances.  That advantage rarely EVER exists when looking at lower priced vehicles.  When you examine the calculations above, you can see that the tax advantage leasing offers is due entirely to the limits that the IRS places on depreciation for luxury vehicles.

Please give us a call if you are considering leasing a business auto.  It only takes a few moments to run through the calculations to determine your best option.  The lease vs. buy decision depends upon a LOT of different factors (cash flow, business use, total miles driven, etc) and examining options and crunching numbers just happens to be one of the things we do best!

 

 
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