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Leasing a car

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  •  prison-doc 
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    Since there have been couple of car topics lately, I thought I would ask this.  Does it ever make sense to lease a car?  I have always been under the impression not to do that as you would be throwing money away and not ever owning the vehicle.

    I recently was speaking with a colleague, who is in a similar situation as I am.  We both have S Corp as our business model.  He was telling me that he never buys a car.  He leases a car every 3 years.  He informs me that all the money (outside of gas, repairs, etc..), he spends on the lease comes back to him at the end of the year.  Does that make sense?  Would it be worth it to lease a car if you kept the miles within the agreement, instead of buying one if you got all the lease money back at tax time?  Seems far fetched to me but he tells me that businesses do that all the time.

    #171564 Reply
     Gamma Knives 
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    Sounds shady. My suspicion is that a decent number of people who write off cars on taxes would not withstand an IRS audit (but IRS is doing less audits). If someone has been doing it for years but never been audited that doesn’t mean it was legal. (You can drive in excess of the posted speed limit everyday and not get a ticket but that doesn’t mean it is legal.)

    Driving to and from work is generally not a business use. What would be your business use of the vehicle?

    Outside of taxes leasing is not usually attractive compared to owning but it depends on the terms and how often you will be purchasing cars. I have known people who were able to get great lease deals but they were motivated to find the best deals and understood how to work the system.

    #171568 Reply
    Liked by prison-doc
     Kamban 
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    I am not 100% certain on this but if you own your own car you can claim only miles for travel between businesses ( like office to hospital) and not count the home to office miles. So the total number of miles claimed per year is less than what you use for work and at IRS rate of cents per mile.

    If the business owns a car you can use it from home to work and from work to hospital etc but it has to be only for work related use. So in effect you need a 2nd car for leisure purposes. All costs relating to the business car can be taken out from office expenses. This makes sense if you own your practice and likes to drive nice higher end car to work and don’t want to deal with costly repairs these cars are known for ( Mercedes, BMW, Jaguar etc). One of the persons I know does this. He has a office Mercedes leased and a home minivan.

    #171574 Reply
     jhwkr542 
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    Here’s my take on this:

    If you’re going to lease a car through your business, you better be using a lot of miles for business.  Otherwise, you’re just going to be letting the tax tail wag the dog and “justifying” a poor financial decision by getting a tax break.

    My current practice has a long-standing car lease thru our C-corp.  The devil is in the details:  we get a $1000/mo allowance to use on the lease.  Whatever isn’t used on a lease is added to our salary.  Gas, maintenance, insurance, and title/tax are all paid thru the business.  What is reported to us as income is (the value of the car at the beginning of the lease + $600 for gas) * portion that is used for personal miles.  If we don’t lease thru the business, we only get the $1000/mo but don’t get any reimbursement for gas, etc.

    Since most of our driving is to and from work, most people should be claiming that they use the car for 95% personal use, but they lie and randomly claim anywhere from 40-80% personal use with no documents to support it.  In the event of an audit, these people would be hosed.  I claim around 90% personal use, and that’s probably too low of a figure.

    The big benefit is from all of the gas and other stuff that is written off.  However, this benefit gets minimized in several ways:  1.  Not using the car much for business use which increases your reported income  2.  Buying a big expensive car where you’re paying more for the lease (and maintenance, insurance, etc) than you would otherwise

    I’ve done rough estimates, and leasing makes some financial sense if you keep the car lease payment under $500/mo for a car under $35k and use the car for at least 30% business deduction.  You still lose some money every year, but you end up only spending about $1k/year more for the car, but you drive a new car under warranty.

    That’s all fine and dandy in theory, but what happens is that people use all of their lease allowance and buy more car than they otherwise would.  Off the top of my head, here’s what I know ppl are driving:  Acura MDX (mine before I actually ran the numbers  😥 ), Ford Expedition, Audi Q7, a couple huge Ford F-150s, Range Rover, BMW X5, fully loaded Toyota Highlander, customized Jeep rubicon, Chevy Suburban, Chevy Volt

    #171587 Reply
    Craigy Craigy 
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    It makes sense to lease a car if you can lease one cheaply.  If the lease payments are similar to (or less than) the depreciation you’d take buying, it definitely makes a lot of sense.  In many states, there’s also a sales tax benefit to leasing vs buying.

    Generally speaking, if you can find a lease for $200-$300/month, or sometimes even less, it can make a lot of sense to lease as it limits your risk, keeps you in a new and reliable car, saves you the hassle of having to maintain or sell a used car, etc.  Spending $3k/year, e.g., for new reliable transportation can be a very thrifty and sensible choice.

    Business wise, it’s sometimes easier to expense a lease vs a purchase, but that’s a question for your CPA.

    LEVEL 1 WCI FORUM MEMBER.

    #171593 Reply
    Liked by LIFO
    ENT Doc ENT Doc 
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    He informs me that all the money (outside of gas, repairs, etc..), he spends on the lease comes back to him at the end of the year.

    Click to expand…

    Wondering how exactly that occurs.  There are a few ways of expensing out a vehicle, but these are effectively deductions, not credits.  So while some money may be coming back to him it’s not all the money, as he states.

    #171597 Reply
    q-school q-school 
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    He informs me that all the money (outside of gas, repairs, etc..), he spends on the lease comes back to him at the end of the year. 

    Click to expand…

    Wondering how exactly that occurs.  There are a few ways of expensing out a vehicle, but these are effectively deductions, not credits.  So while some money may be coming back to him it’s not all the money, as he states.

    Click to expand…

    it’s more likely that he is ignorant of the actual numbers, or lying or incorrect.  or some combination of above.

     

    #171599 Reply
     Antares 
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    For years I purchased and then kept each car for ~10 years. A few years ago my CPA advised me that because I have two offices, I should take advantage of the tax benefits of leasing.

    The funny thing is that when the lease term was up, I didn’t feel I needed a new car, and didn’t want to spend more money on a new lease. I don’t like having a permanent car payment. So I bought the leased car, and plan to keep it another 7 years 🙂

    #171616 Reply
    Liked by Kamban
     LIFO 
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    If you’re in the market for a new car and are flexible on what car you want, leasing can make a lot of sense.  Leases can get far more subsidy support than sales and if you are able to stack rebates and discounts, the savings off of msrp can be quite good.

    Some auto makes lease much better than others.  For example, you can lease an Acura TLX for less than a Honda Accord.  You can lease a Jetta for <$150/month. You can lease a subaru outback for ~$200/month.  On the other hand, you can lease an Audi for the same price as your purchase payment.

    I’m not saying buying a camry with cash and holding it for 10 years is more expensive.  But if you are early in your career and want to limit debt, limit interest expenses, can come up with tax write offs, and still need reliable transportation leasing should not be thrown out just because stupid people lease their cars as well.

     

    #171626 Reply
    Liked by RosieQ
    jfoxcpacfp jfoxcpacfp 
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    Unless he is, as jhwkr542 said, driving the car for business purposes an awful lot, you cannot write off the expenses. Whether you lease or buy, you can deduct only the proportionate miles/actual cost that you use the car for business. It’s kind of like deducting your home office – you can deduct only the % of your home that you use exclusively for business, not the whole house. The rest is personal.

    Unfortunately, many CPAs pawn this off on clients as legal and a great way to sneak in a car writeoff – “Just by incorporating!!!” There are definitely ulterior motives at play there.

    Leases make sense only when you like to have a new car every 2 or 3 years. (I am NOT saying it makes sense to have a new car every 2 or 3 years). Otherwise, it is better to buy.

    As far as expensing a car for business use:

    • If you buy expensive cars and/or have very low mileage, it usually makes sense to choose “actual” expense.
    • If you buy less expensive cars and/or drive them many miles/many years, it usually makes more sense to choose the mileage deduction.

    Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~ 270-247-0555
    https://fox-cpas.com/for-doctors-only/

    #171635 Reply
     prison-doc 
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    Thanks for the above advice/comments.  I thought it sounded fishy.  I own a 2006 Accord and know I need to upgrade to a new Accord, more for safety reasons than anything else.  But he was trying to convince me to lease a luxury car and made it sound like it was almost “free money.”

    #171647 Reply
    Drop it into MD Drop it into MD 
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    I think that is the biggest problem with leasing.  You lease more then you would buy.  If you know you want a Camry but it is a better deal at the time to lease it rather then buy and own it for x years but you extend that logic and by a Tesla then you got suckered.

    #171652 Reply
    Liked by Tim
    ENT Doc ENT Doc 
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    Thanks for the above advice/comments.  I thought it sounded fishy.  I own a 2006 Accord and know I need to upgrade to a new Accord, more for safety reasons than anything else.  But he was trying to convince me to lease a luxury car and made it sound like it was almost “free money.”

    Click to expand…

    This sounds like “join me in my lifestyle inflation/bad decision making” than anything else.  You really think the 2006 Accord has safety issues?  Hell, I’m still in a 2003 Accord and didn’t know my life was on the line every day.   😉

    A more interesting analysis would be buying a used 2012-ish Honda, and taking out a low interest rate loan vs leasing a new Honda (or higher priced car for that matter).  I’ll bet the used car still lands you ahead since you’re deduction/expense is no different between the two options and the monthly payments are worse with the lease (typically).

    #171660 Reply
     childay 
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    Leases make sense only when you like to have a new car every 2 or 3 years.

    Click to expand…

    Aside from the business expense discussion this is my understanding as well.  If you are swapping cars out that frequently it may make sense

    #171667 Reply
     Larry Ragman 
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    I knew a guy who had a side business to, as best I could tell, mine it for tax savings. He explained to me that he wrote his own car off at 100% use. So, naturally I inquired how that might be? The gist of the scam, I think, was that he and his wife had another car for personal use, so he claimed this was solely for business use.  Thing was, he worked with me and I knew he commuted in that car. Not saying it was directly related but eventually we let that guy go for, shall we say, questionable ethics.

    #171708 Reply

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