Preface: Vehicles are one way to reduce tax expense, what options are most favorable?

 

Business Vehicles

 

Deciding whether to buy a vehicle versus leasing is not always easy. The main advantages of leasing are lower monthly payments than a loan, and less cash paid upfront to provide transportation for you or your employees. A purchase provides depreciation expense if actual vehicle expense deductions are employed; a lease payment is deductible as an expense too. For instance, if you lease a vehicle you can deduct the monthly lease expense plus fuel, repairs and maintenance.

 

So why lease when you can afford to buy? If you lease, you can often obtain more car for the same monthly payment as a purchase. This is the main reason luxury vehicles are leased rather than purchased. When the lease term is finished you can obtain a new vehicle. Warranties often last the life of a lease and increase the ease of vehicle ownership, and some leases are maintenance free too. Disadvantages of leasing – you pay for door ding’s and spills at the end of the lease – deductions from the security deposit which can be thousands in addition to the monthly payments. If you want to terminate a lease early there are additional costs associated with such, and if you lease you will always have vehicle payments to make without gaining equity. Gap insurance, covering the cost of the lease if the vehicle is totaled, is most often a part of the lease. If you purchase a new vehicle every two or three years, or want to minimize monthly payments, leasing may be for you. Leasing also has a lower sales tax cost, which can save significant dollars on a luxury auto. For tax purposes if you lease a vehicle for your business you will have to account for lease inclusion income on your tax filing.

 

Should you purchase your vehicle instead of leasing you will have something tangible once all payments are made. You will own equity. Whereas a lease payment of $450 a month provides only comfortable driving, a loan payment will provide ownership. If you plan to have the vehicle more than five years, or if you drive more than 12,000 miles a year it most often pays to purchase.

 

The Internal Revenue Service (IRS) establishes deduction rates each year for auto expenses. The standard mileage rate is the simple calculation for determining auto expenses and is an estimate of maintenance, repairs, taxes, gas, and insurance. The mileage rate for the standard deduction is commonly used when convenient because of simplicity – track your business miles and compute a rate per mile times the number of business miles driven. If you don’t use the standard deduction in the first year you own the vehicle you can never use the standard deduction method with that car. Standard mileage cannot be used if your vehicle business purpose is for hire, such as a taxi, or if you own a fleet of vehicles.

 

Actual expense for vehicles includes tracking and expensing costs on an individual basis. Expenses include depreciation, licenses, gas, oil, tolls, lease payments, insurance, repairs, tires, garage rent, and parking fees. If you drive your vehicle for both business and personal use, you must tabulate the percentage. Actual expense may provide a greater expense benefit but requires more receipt saving and records than the standard mileage method. If you have a fleet of vehicles, five or more, you must use actual expense.

 

If you plan to add a vehicle(s) to your business, discuss with your tax accountant the cost/benefit options of purchase versus lease, and the expense method of standard mileage or actual expense.