Leasing or Buying car for tax-write off for Businesses.

[RLiu818]

It seems alot of people lease cars so they can write off the payments as an expense in order to lower their taxes from their business.

Would it be better to purchase the car in full and write off the expense by depreciating the value of the vehicle through its useful life?

What are the disadvantages and advantages of each method?

 

[Hank]

it depends on your particular situation. factors include: income level, driving mileage, how much $$$ the vehicle cost, total amt of deductions by the end of the yr, etc.

scenario 1: if you make close to $100k (or 3+ times the price of the vehicle) you may want to write off the whole car (no depreciation allowed afterwards, but mileage deduction is given)

scenario 2: if you don't make that kind of $$$ and drive alot, take the deprec over the years (up to 5 yrs) + mileage (this option helps to spread your deductions over time instead of having alot one year and a little the following yr)

scenario 3: same as #2, but with shorter commute, you can choose option#2 or choose to lease a car (price of car should reflect your income level also)

#2 is generally the way to go.
imo, if you have the $ to buy a new vehicle and need it, do so and have your accountant figure out which scenario would be best for you at year's end. lol

 

[bulldog-yota]

Most ppl I know, who can deduct their cars for tax, lease them. Give your accountant a call, before you do anything, he/she should know your finances best and what would work best for you. If you dont have a good accountant, you better get one or else you might not be in business for long

 

[jharris2]

Most ppl I know, who can deduct their cars for tax, lease them. Give your accountant a call, before you do anything, he/she should know your finances best and what would work best for you. If you dont have a good accountant, you better get one or else you might not be in business for long

:iagree:

Excellent advice! Thanks, Bulldog!

 

[kujhawk80]

Before I write a two page monograph on the pro's and con's may I just ask if you own the business and if so is it a sole proprietorship, partnership/LLP, or LLC/Corporation? Please advise as this would send me in the right direction. Thanks!

 

[RLiu818]

Before I write a two page monograph on the pro's and con's may I just ask if you own the business and if so is it a sole proprietorship, partnership/LLP, or LLC/Corporation? Please advise as this would send me in the right direction. Thanks!

Its my father's business and he is the one looking to buy/lease.

He owns a motel (14-units). Sole Proprietorship.

 

[kujhawk80]

Alright, well here are his options:
1) He could lease the auto and expense it through the business as he makes the lease payments. Since this is a sole proprietorship, this would be more beneficial to him than taking a deduction on his personal tax return.
2) Since the vehicle is not over 5000lbs. he is not allowed to take the extra expense during the first year and therefore would have to capitalize the cost of the vehicle (purchase price, taxes, fees, etc.) and depreciate it for 5 years for a tax basis and as fast as he wants for financial reporting purposes (creating a deferred tax asset). However I would still recommend a lease, so he would not have to carry a liability on his books, but rather go with option 1 and just expense his costs through the P&L as he pays.
To me, judging by the vehicle, he should probably go with option 1 unless he would want to step up to the Sequoia, which I would than go with option 2 to gain the benefit of being able to expense 50% in the first year (accelerated depreciation).
Since this is for his business there is no individual tax benefit until he calculates in his income from his business into his individual filing.
Hope this helps.

 

[RLiu818]

Alright, well here are his options:
1) He could lease the auto and expense it through the business as he makes the lease payments. Since this is a sole proprietorship, this would be more beneficial to him than taking a deduction on his personal tax return.
2) Since the vehicle is not over 5000lbs. he is not allowed to take the extra expense during the first year and therefore would have to capitalize the cost of the vehicle (purchase price, taxes, fees, etc.) and depreciate it for 5 years for a tax basis and as fast as he wants for financial reporting purposes (creating a deferred tax asset). However I would still recommend a lease, so he would not have to carry a liability on his books, but rather go with option 1 and just expense his costs through the P&L as he pays.
To me, judging by the vehicle, he should probably go with option 1 unless he would want to step up to the Sequoia, which I would than go with option 2 to gain the benefit of being able to expense 50% in the first year (accelerated depreciation).
Since this is for his business there is no individual tax benefit until he calculates in his income from his business into his individual filing.
Hope this helps.

can you explain the 5000lbs. thing to me? THe car he is planning to buy/lease is actually the Land Cruiser, not 4runner.

 

[Faeylyn]

1. Tell your father to see an accountant in his home state.

2. If he's purchasing a new Land Cruiser, the gross vehicle weight of that vehicle is over 6,000 pounds. If you purchase a business vehicle between 6,000-14,000 pounds, you are entitled to deduct the majority cost of the vehicle in the first year.

It works like this. He can deduct the first $25,000. On top of the first $25,000, he can deduct 30% of the remaining cost as a "bonus depreciation". On top of that, he can deduct the first year's depreciation of whatever remains.

Example: Say the Land Cruiser costs $60,000 out the door. He can deduct a total of $40,400 the first year. $25,000 initial deduction + $10,500 (30% of 60,000-25,000) + $4,900 (20% of $60,000-25,000-10,500). He would then deduct $4,900/year for the remaining four years.

This is good if you have a large current income and you want to bring it down fast in the first year and spread it out in the remaining years.

 

[Faeylyn]

BTW, in case someone is curious....

If you purchase a vehicle for your business with a gross vehicle weight over 14,000 pounds, you can start with a $100,000 deduction. These are the new rules signed by the President last month, so they should be good for a year or two. Or until someone passes new rules.

 

[Faeylyn]

One more thing....

Your father should really consider converting to an LLC. It provides a nice cushion against liability. And since he owns a motel, I imagine he will eventually need this protection.