Are you wondering if you can benefit from a business vehicle tax deduction? The big question is whether it is best to lease or buy a car for the business. How do you choose which one is best for you? Here, we look at the various factors you should consider in terms of tax breaks.
Loan Payments or Lease Payments
If you finance a vehicle purchase, you will need to take out a loan that must be paid back even when the vehicle’s value drops below the loan amount. So, if, for example, you have an accident and the car is damaged, you will still need to keep making payments.
If you lease a car, its residual value when the lease ends may be lower than the cost of the lease. Also, with a closed lease, it is possible to walk away with no penalties.
Purchased vs. Leased Vehicles and Taxes
There are two key taxation factors when choosing between whether to buy or lease a business vehicle:
- Depreciation –If you buy a business vehicle, bonus depreciation or accelerated depreciation could be available, subject to certain limitations. Business passenger vehicle depreciation will increase your deductible expenses during the first year that your business owns and uses the car. You must use the vehicle for business purposes more than half the time to qualify for a depreciation deduction. If you lease a car for business, tax-deductible benefits for business passenger vehicle depreciation are not available. Instead, the company can take deductions for the expense of the lease.
- Mileage expenses – Deducting vehicle costs for mileage is possible for sole proprietorships that file Schedule C. This applies to both purchased and leased vehicles. Partnerships or corporations must record actual car expenses. If you own a car, high mileage could reduce its value at resale. Meanwhile, a leased vehicle will have a mileage limit. You could receive a penalty if you exceed that limit. You can use either actual costs or a standard mileage rate for leased cars. However, there are conditions if you are using a standard mileage rate and have a leased vehicle. You must use this rate from the initial year that you use your car throughout the entire lease. Whether you own or lease a vehicle for your business, keeping track of the mileage is vital. You must separate the mileage between personal and business use.
Another tax-related consideration when choosing to buy or lease is cash flow. If you want to buy a car, you should plan to time the purchase carefully. This will ensure you receive a tax benefit on your tax return.
Disposing of Your Vehicle – The Tax Advantages
If you return a leased car to the dealership when the term ends, you will not generate a loss or gain. But if you sell a vehicle you own, this may generate a taxable event. Selling a vehicle could result in a deductible loss if the undepreciated cost of the vehicle exceeds the proceeds from the sale. The sale could result in a taxable gain if the vehicle is fully depreciated. Gain from depreciation recapture is taxable as ordinary income.
Should I Buy or Lease?
Your business circumstances should dictate whether leasing or buying a business vehicle is right for you. Knowing the facts about the business vehicle tax deduction can help you make an informed decision.
For questions or more information about this article, please contact our tax professionals at taxalerts@windes.com or call toll-free at 844.4WINDES (844.494.6337).