Q: Tax Playa, is it better to own or to lease a company car?
Geoff, Arlington VA
A: Geoff, there are advantages and disadvantages to both. As a general proposition, it makes more tax sense to lease a car, but more economic sense to own it. Business owners looking to make this decision really need to run the numbers both ways before making a decision...
For more information on this, see IRS Publication 463, Travel, Entertainment, Gift, and Car Expenses.
First of all, there are no tax advantages for personal use of a vehicle. Business use of a vehicle for employees and owners of businesses are what is in scope here.
There are two basic ways to account for business use of a car, depending on whether you own or lease the car:
Owning a Car
If you own the car, you can choose to take either the "actual expenses" method for business use, or the business mileage.
I generally recommend car owners to use business mileage, since it is about the same value and is far less time-consuming.
I got into a longer discussion about this earlier, but will run through the basics of each:
1. Business mileage. For this, you simply multiply the number of business miles driven by the business mileage rate ($0.485 per mile in 2007). You can add to this business-use percentage of parking fees and tolls.
2. Actual expenses. For this, you have to add up all expenses of the vehicle (depreciation, gas, maintenance, insurance, interest if incorporated, property taxes, parking, tolls, etc.) and multiply it by the business-use percentage of the vehicle. This involves a lot of record-keeping.
For depreciation purposes, most cars are a five-year asset, and listed property for expensing rules. However, there is an annual dollar cap on the value of the depreciation deduction, so the actual number of years can be far greater.
Leasing a Car
The choice here is basically the same--business mileage vs. actual expenses. The difference on actual expenses is that your lease payments substitute for the depreciation deduction.
The business percentage of the lease payments must be reduced by an "inclusion amount" for cars over a nominal value. This roughly equates to the annual dollar cap on depreciation for vehicles. In addition, any up-front costs of the lease must be amortized by month over the length of the lease.
Making the Choice
As I said above, leasing a car is, by itself, usually a bad financial move. Therefore, if your plan is to use business mileage, you should buy a car (all other things being equal).
If you plan on using actual expenses, the only major difference is the depreciation (subject to the cap) vs. the lease payments and amortized fees (minus the inclusion amount). This is simply a matter of running the numbers and seeing which one comes out better. Most of the time, the lease payment will be a greater value tax-wise. However, you should check to make sure that this tax advantage makes up for the fact that you are paying for a vehicle you will never own.