Leasing as a business expense

[JHZR2]

Hello,

Ive always advocated buying a vehicle, however my wife has a small, small business, and it seems that leasing vehicles offer a good business expense.

My thought is to lease the vehicle for the business expense, then re-bu it as a CPO with extended warranty as a personal use vehicle. Make sense?

What are the pros/cons of doing this? As long as the money factor is low and/or paid down via security deposits, it could be similar to financing a vehicle, and the benefit is that those costs could be tied into the business expense.

This way as I see it, you get your cake and eat it too... Take the biggest depreciation hit under the lease, where it all is tax deductible, meaning that any depreciation isnt really as much of a hit, and then buy cash via a CPO program, so you get the extended manufacturer's warranty.

Thoughts? I am NOT one who ascribes to the buy used school, thinking rather that the best lifecycle cost is buying new and maintaining to >>200k miles. Others' needs may vary, but Im not interested in discussing used cars. Rather, the pros/cons of the lease for a business expense.

Any thoughts?? Thanks!

 

[duaneb9729]

If the business can support the payments, why not, but check with the manufacturer about it becoming a CPO car after the lease.

My MIL tried to buy out her last two cars and the dealers wanted more for the cars then they were selling for on the lots.

Her cars were not any thing special either, a Lincoln cont. and a Lexus RX 330

So you may want to ask or negotiate that in your deal.

Good luck!

 

[Win]

My accountant has never suggested leasing vehicles, although I have never specifically discussed it with him.

I prefer to own property outright without debt expense; I sometimes lease real property between my entities, but something I own still owns it outright.

I also avoid commingling personal and business use property. Only my G8 is on my books, and I keep an accurate log of the personal use versus the business use.

I never saw any merit in paying rent to someone else on anything, but it will be interesting to read the responses to your inquiry, and what does not work for one, may well work for another.

 

[Gary Allan]

Since you like to buy new and keep forever, there's not a whole lot of downside to a lease and purchase. You may pay more sales tax per month during the lease. PA adds 3% to auto-leases.

..but you will be buying an expensive used car at the end of the lease ..but you had a very cheap new car during the lease. In my opinion it's as broad as it is long. It still comes down to the price negotiated at lease signing.

 

[CivicFan]

if the car is used for business purposes then leasing and then recording the lease payments as lease expense is a legitimate option.

 

[bepperb]

Sure, but you are paying money to the leasing agency instead of in taxes, which is certainly not as noble a cause, and how much is the difference? If it's significant I'd be all over it. But leasing then buying seems like an expensive way to buy an asset.

I assume the reason you don't want to buy a vehicle and then depreciate it macrs is because the business isn't big enough to absorb that cost with it's profits?

 

[JHZR2]

Yeah, that is right. Ive heard you can write off the full lease cost, if the business can absorb it, or at least get a "better chunk" of real expenses written-off in a lease.

Our small business is real small... but I just am trying to figure if the maths support a better write-off/better deal by leasing rather than just writing off related straight mileage at the normal rate, or a percentage of actual expenses on an owned vehicle...

 

[crazyoildude]

You may not need the "business" expense its all in the way your accountant does the books...A good accountant knows all the loopholes..
An account once asked me what is 2+2 of course i answered 4 she said Wrong! Its whatever you want it to be...

I used to be married to her....Still friends.

 

[Drew99GT]

You can only write an "inclusion amount" of operating lease expense.

http://www.irs.gov/publications/p463/ch04.html#en_US_publink100034045

I could try and explain it but then I'd have to kill MYSELF!

Regardless of whether to lease or buy when it comes to taxes, the bigger factor is the amount of mileage you drive and whether to use the standard mileage rate or actual expenses.

In general, you're going to come out ahead buy buying IMO, especially if you keep vehicles for a long time.

If you try and pull some scheme of leasing a vehicle for business expense and then buying it at the end of the lease (simply to try and get an extended warranty), and continuing to use it for business expense, the IRS can then say it was a capital lease and make you depreciate it, and then you'd have to backtrack to day one and do everything over.

If you deduct lease payments, you'll be choosing to deduct actual vehicle expenses and you'll be forced to do that for the life of the vehicle (can't change back to mileage).

For small business that have cars that are a mix of personal use and business use, and they drive a fair amount for business use, I always say choose the standard mileage rate (whether leased or bought). It's simple, easy to account for, and it's SIMPLE! And you generally come out ahead.

 

[Bob Woods]

From a paperwork stand point I found it easier to use the standard deduction for automobile use, no depreciation, no adjusting the basis of cost. Just like home office expense its a pain in the arse when you realize you have to adjust the basis of cost for every dollar you write off when you sell your house.

 

[Drew99GT]

Indeed, and if you sell an asset that you've depreciated, then you get into potential income recapture issues if you sell something for more then the book value of the asset. If you depreciate a car under MACRS and then sell it later, you'll have to pay income tax on that difference in book value. Many assets quickly end up with a tax basis of 0 because of IRS accelerated depreciation schedules.