I’m often asked what’s the best way to go when it comes to your business vehicle. Is it best for you to own or lease?
Many self employed taxpayers reason that since lease terms are often shorter — and lease payments higher than monthly loan payments — they can write off the entire lease payment on their tax return and get a bigger tax deduction.
The reality is, regardless of whether you lease or buy the vehicle, the amount that can be deducted from your taxes for business use is directly related to what percentage you use the car for business. Tax accountants refer to this as your Business Use Percentage, or BUP.
IRS record-keeping rules require that you keep a log of the total miles you drive, as well as the business miles you drive, along with the business purpose. Either way – own or lease – you’ll then take that percentage (BUP) of your total expenses (lease payment, car insurance, fuel, repairs, license, maintenance, etc.)
If you’re trying to decide right now whether to buy or lease a business vehicle, Bankrate.com has a helpful online calculator to help you compare the overall costs of each. If you’re detail-oriented and like number-crunching, then gather all the numbers for the lease your are considering versus the numbers for buying, and then use their online tool. Or you can ask your accountant to determine which option is the best for your situation.
While the best course of action will always depend on your specific situation, in the opinion of Sandy Botkin, CPA, a former IRS employee and renowned small business tax expert, it’s usually better to buy than lease. In fact, his recommendation is to buy a vehicle and keep it at least four or more years. As part of his rationale, Botkin cites the “Add back” tables developed by the IRS for passenger automobiles that are leased. The table calculates dollar amounts which you must add to your income on your tax return if you lease a vehicle. The add back amount is based on the fair market value of the car, and how old the lease is. The tables are set up so that the more expensive the car, the worse the leasing deal is. In addition, the longer the lease, the worse the deal is from a tax perspective.