Last year was the best year for the automotive industry since 2005, with more than 16.4 million vehicles sold. This year is expected to be even better, with new models and generous financing offers attracting attention. If you're in the market for a new car, truck, or van for your business, decide whether to buy or lease, and who (you or the business) should take this action. The following is based in part on my article from 2009.
As a general rule, if you choose to deduct your actual expenses rather than use the IRS-set standard mileage rate (discussed later), leasing can result in larger annual tax deductions than owning a vehicle. This is because dollar limits restrict annual depreciation allowances on cars, light trucks, and vans weighing no more than 6,000 pounds. The limits for vehicles placed in service in 2015 can be found in Rev. Proc. 2015-19; the limits for vehicles placed in service before this year can be found in IRS Publication 463. If the vehicle is used less than 100% for business, the dollar limits have to be apportioned (e.g., if the car is used only 75% for business, of the $3,160 limit for a pre-owned car placed in service in 2015, the deduction would be only $2,370).
Heavier vehicles, such as certain SUVs, are not subject to these dollar limits; a deduction of up to $25,000 is allowed for the year of purchase, plus regular depreciation, to produce a sizable write-off in the year of purchase. And there is no dollar limit for non-personal-use vehicles, such as a van with a permanent sign on the outside and only a driver's seat and jump seat inside. The deduction for such vehicles is up to the Sec. 179 deduction limit (which could be $500,000 for 2015 if the 2014 dollar limit is extended or made permanent).
In contrast, if you lease the vehicle, your monthly lease costs, along with other expenses, are deductible. If the value of the vehicle when the lease begins exceeds a threshold amount ($17,500 for 2015), there's an income add-back, but it's very modest. For example, the income add-back for a vehicle first leased in 2015 and valued at $60,000 is only $63.
Whether you or the business owns the vehicle or leases it, you can deduct business usage based on the IRS rate (57.5 cents per mile in 2015), plus parking and tolls, rather than claiming depreciation, lease payments, or other actual costs of business use. The standard mileage rate cannot be used by businesses with four or more vehicles (something that's usually not an issue for small businesses).
Tax credit for electric vehicles. There is a special tax credit for a qualified vehicle that you buy. If the business owns the vehicle, the tax credit is part of the general business credit (an overall limit on credits you can claim annually). FuelEconomy.gov has links to qualified electric vehicles.
If the company owns the vehicle. Tax write-offs belong to the company. If the business allows you to drive it for personal purposes, including commuting, the business deducts the expenses of owning or leasing the vehicle, but you have to pick up income for your personal use. Valuation methods can be found in IRS Publication 15B.
If you drive your personal vehicle for business. If you are an employee of your corporation, you can deduct your costs only as miscellaneous itemized deduction to the extent that they are more than 2% of your adjusted gross income (AGI)). If your corporation reimburses you for the cost of driving your personal vehicle for business, make sure to set up an accountable plan so the reimbursements are tax free.
If you are a self-employed person, vehicle-related write-offs are claimed on Schedule C.
For a partner or LLC member, vehicle-related write-offs are claimed on Schedule E; they are not subject to the 2% limit applicable to shareholder-employees.
Leasing may be easier on your cash flow if your monthly payments are lower. It is a way for you to afford a more expensive vehicle than having to buy it. But leasing may be too expensive if you expect to drive the vehicle more than 12,000 or 15,000 miles a year (depending on the terms of the lease) because of the cents-per-mile charge for excess mileage.
Non-tax benefits of company ownership:
- The vehicle is an asset on the company balance sheet.
- Your business may enjoy more favorable insurance rates if the company has more than one vehicle.
- More favorable financing terms may be available.
Note: Usually gas mileage is a concern for vehicles expected to be driven extensively. However, today's relatively low gas prices have made this issue a minor concern. If you expect to keep the vehicle for a number of years, however, gas prices could rise and the miles-per-gallon could become an important factor in your vehicle selection.
Discuss any proposed acquisitions with your tax advisor and insurance agent to get information needed to make your decision.