Business Vehicle

When we meet with clients, the question of business vehicles always comes up. There are two sides to this, actual cost vs mileage and lease vs own. Actual cost vs mileage will be covered in another article. When considering to lease or buy, there are a few things you will need to consider like out-of-pocket cost, your current cash available, tax laws, and the time value of money. Tax Laws and the time value of money is where we can assist you.

Getting ready to walk into the car dealership, the one thing on your mind is who’s going to walk up first to greet me and start the fun of negotiating. The car salesperson can answer all your questions about the car, but I would suggest not asking what are the tax laws on my business purchasing or leasing this vehicle.

Most people will tell you to buy the vehicle, take depreciation, write off your fuel cost, and be happy, but actually there are times when leasing is more beneficial.

What’s the best way to compare buying vs leasing a vehicle for your business?

The formula below will help you decide with lease or buy comparisons. You will need either a financial calculator or know how to use excel. As a Coastal Accounting & Tax Client, we do this for you. The goal is to get the present value of the vehicle

If you Buy

Down payment in cash

Add

PV of total monthly payments

Add

PV of tax savings from interest & depreciation – Yr 1

Subtract

PV of tax savings from interest & depreciation – Yr 2

Subtract

PV of tax savings from interest & depreciation – Yr 3

Subtract

PV of cash from sale (FMV at time of sale)

Subtract

PV of tax savings if sold at a loss

Subtract

PV of tax due if sold at a gain

Add

Net Cash Paid (PV)

Total

If you lease

Down payment in cash

Add

PV of total monthly lease payments

Add

PV of tax savings – Yr 1

Subtract

PV of tax savings – Yr 2

Subtract

PV of tax savings – Yr 3

Subtract

PV of payment at end of lease

Add

Net Cash Paid (PV)

Total

A simple calculation would be:

Total all payments to buy a vehicle then minus residual value

VS

Total all lease payments

When you start the process with the car salesperson, you might be trading in your own personal vehicle for the new business vehicle. Be sure to let your tax preparer know this. This is considered the down payment of the leased vehicle and benefits you as the owner. As we will cover later, this trade in value is your prepaid rent/lease of that vehicle. You will want to use this, so make sure to inform your tax preparer of this down payment and all the monthly payments you made that year.

Keep me in mind, that when you trade in your personal vehicle, you are technically selling your vehicle to the dealership at FMV, fair market value. You most likely sold this vehicle for a loss, and the government doesn’t allow you to take a personal loss. If you have a gain on your personal vehicle, then you will need to claim the capital gain on your personal tax return.

Before deciding what to do, it is best to contact your tax professional to get their opinions. They will need to know what type of vehicle it is, how much or percentage of the time the vehicle will be used for business use, the weight of the vehicle, interest rate, leased monthly payment, and expected monthly cost of the vehicle.