As tax professionals, we hear this question very often. While there are a variety of perspectives to consider when making that decision, we will look at it through a tax perspective. However, as with most decisions in life, taxes should only be one of the considerations. Here are a few of the non tax considerations on buying or leasing a business vehicle:
1) How many miles do you expect to drive each year. Most leases have mileage limits after a certain amount driven each year.
2) How many years do you plan on keeping the car.
3) How much do you want to spend on your monthly payments (lease payments are usually quite a bit less than monthly payments on car loan)
Now for the good stuff, let’s get into the tax considerations for the business owners whether they lease or buy. With both purchased and leased cars, you can deduct the related expenses by using the standard mileage rate or actual expenses.
If the vehicle is owned, you can switch between the standard mileage rate or the actual expenses from year-to-year, depending on which is more favorable. For example, if one year had a lot of miles, but not a lot of actual expenses, the standard mileage rate can be used. If the next year there wasn’t many miles, but there were substantial repairs done, you can use the actual expense method. If the vehicle is leased, you can also choose what method is more beneficial, but once the standard mileage rate is used, it must be used for the entire 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 gas, oil, insurance, parking & registration fees, lease or rental fees, repairs, tires, loan interest, etc.
Here is where the expenses differ between purchased and leased vehicles using the actual expense rules.
First let’s discuss leased vehicles. You can deduct the business percentage of your lease payments. So if you pay $500 a month for the lease, and the business use is 80%, you can deduct $400 a month of that lease payment. There is one hitch however with luxury automobiles. 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 more preferable. But don’t forget if you purchased the vehicle, you can also deduct the interest on the vehicle’s loan based on the percentage of business use.
For purchased vehicles, you can’t deduct the monthly loan payment. Instead, the vehicle is depreciated over 5 years, and limited by maximum allowable limits. As mentioned though, the interest piece of the monthly payments can be deducted.
If you purchased a car this year to transport passengers like for 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.