By Dr. James M. Dahle, WCI Founder
I often hear docs and other small business people mention how they are so smart for having their business lease their car. While I'm sure there is a situation where this has worked out well, most of the time it is a mistake, and most of those who are not convinced that it is a mistake are cheating on their taxes. Let me explain.
Separating the Issues
There are really two issues to talk about here. The first is whether your business should own (or lease) a car or whether you should do it personally. The second is whether the car should be purchased or leased. It's important not to conflate these two issues. Before we get to those questions, you need to understand some background information about how this stuff works.
Business Deductions Are the Best Kind of Expense
Any expense in your life that can be taken as a business expense should be taken as a business expense. You see, a business expense comes right off the top. It's even better than an above-the-line deduction. It gets deducted before your personal income is even calculated on your tax form. Business expenses are directly subtracted from business revenue before calculating profit. You never pay payroll taxes on that money, much less federal or state income tax. It is truly spending pre-tax money. That said, you're still spending money. You are not financially better off after a $1,000 expense because you can “write it off.” You are still $1,000 * (1 – your marginal tax rate) poorer afterward.
More information here:
7 Tax Deductions Doctors Miss Out On
How to Deduct Car-Related Expenses
A lot of people misunderstand how car-related expenses work when it comes to taxes. At the end of the year, you add up all the expenses of running that car. Then, you add up the total mileage you drove during the year. Then, you add up all of the business mileage you had during the year. You divide the business mileage by the total mileage and then multiply by the total expenses and that's your deduction.
Total expense × business mileage/total mileage = Business mileage deduction
There is another, simpler alternative. You can just take the “standard mileage deduction,” which is 62.5 cents per business mile driven. But you can't take both. It's one or the other. It usually works out better to take the mileage deduction for an older, inexpensive, or paid-for car and to take the actual expenses for a newer, expensive, or leased car. But you should run the numbers both ways. Remember that interest on a car loan is deductible, but the principal portion of the payment is not. However, the entire lease payment IS (mostly) deductible.
The most important thing for you to realize here is that ONLY business mileage is deductible. Personal miles are NOT deductible. Commuting miles, i.e. driving from home to your job, are not business miles.
So, what are business miles for a doc? If you go to three hospitals and a clinic each day, the drive between home and hospital 1 is not deductible, and neither is the drive from the clinic to your house. But driving from hospital 1 to hospital 2 and from hospital 2 to hospital 3 and from hospital 3 to the clinic is business mileage.
People might try to game this system by claiming that one of their work sites is their home office. They even claim the home office deduction to try to justify this. Remember, a home office must be used REGULARLY and EXCLUSIVELY to take that deduction, but you are not required to take the home office deduction to claim your home as a business site. Note that the home office must be used in the same industry as the hospitals and clinic to claim these miles.
You can't work on your little blog at the home office and then drive to the hospital and claim those are business miles. If you do try to claim these commuting miles, you had better document the work you do each time you are in the home office before and after your real job. I think this idea is ripe for a losing audit for most docs, and I wouldn't try it. I really don't think the auditor is going to allow you 80 miles of business mileage deduction per day just because you check your email immediately before and after work. But you can try if you want.
More information here:
Business Mileage Tax Deduction — The Holy Grail of Tax Deductions
Should You or Your Business Own or Lease the Car?
OK, now that you have the background information you need, we can talk about whether the business should own (or lease) the car or whether you should own (or lease) it personally. As you can see from the above equation, it doesn't matter from a tax perspective. If the business owns it, you can deduct the business mileage (or the percentage of the expenses used for business miles). If you own it, you can deduct the business mileage (or the percentage of the expenses used for business miles). Same same. However, there are two important considerations: insurance and income.
Insurance
Many insurance companies do not cover the business use of your car. If you hit somebody or wreck the car while driving it for business, you may just be out of luck. I looked up my policy with USAA. It covers my business miles, as long as that business isn't Ubering people around or renting out the car on Turo.
Income
If the business owns (or leases) the car, you have to figure out a way to deal with the personal miles. Personal use of a company vehicle (including commuting to work) is a taxable business perk, and it has to be reported as income to the employee at least once a year. While the tax outcome is pretty much the same here as if you owned the car personally (check this post if you really want to get into the weeds of how to calculate the amount of that income), it's a major hassle to keep track of all this for your business and report it. Far easier to just add up the business mileage.
My general recommendation is to own the car personally and just take a business mileage deduction (or, for an S Corp, reimburse yourself) for those business miles so long as your insurance will cover that business use. And if it won't, switch to a company that will. This will maximally simplify your life (especially if your car is not expensive), although it will not necessarily minimize your tax bill.
Should You Own or Lease Your Business Car?
Let's get to the second question: should you own or lease that car you are using for business purposes? The general answer here is to own. In the long run, owning a car is usually a better financial move than renting it. Renting can obviously work out better in the short term (there's a reason we all rent a car when we go to Hawaii), but the longer you have and use the car, the better owning works out. The reason why is simple: car rental (and car leasing) companies stay in business because they are profitable. That means that after all of the expenses of buying, maintaining, renting, and selling their cars, there is still money left over. That's the money you save when you own the car instead of renting/leasing it. This is why Dave Ramsey calls it a “fleece” rather than a lease. It's because you're paying too much for what you're getting.
However, I suspect there have been some gears turning in your head. You've been thinking, “Well, if the lease payment is deductible but the purchase of the car isn't deductible, then maybe leasing can come out ahead after-tax. Or if I am purchasing, maybe I should do so with a long-term loan so I can deduct the interest.” What you are forgetting here is the principle I discussed earlier: that you generally do not come out ahead by spending more money just because that money you spent is deductible. If you must spend the money, then try to make the spending deductible. But don't spend extra (on a lease or car loan interest) just because it is deductible.
At any rate, if you need the car for any significant period of time (i.e. long enough to justify the transaction costs, which is a much shorter period of time than a standard 36-month lease), whether for personal or business use, buy it.
More information here:
Depreciation Is a Car Expense
The answer to the “I can deduct a lease but I can't deduct a purchase” crowd is that you can deduct the purchase. It's called depreciation. Now, this is only if you have chosen to deduct the actual expenses instead of the standard mileage deduction. But if you have chosen to do so, then you can calculate the depreciation on the car and deduct the percentage of that used for business mileage. Of course, any excess depreciation must be recaptured at the time the car is sold.
How much is depreciation? The total amount is the amount you paid for the car minus the amount you sold the car for. The only question is how much of that deduction you can take in any given year. You can actually take quite a bit of it early on under current law thanks to additional/bonus depreciation laws. Per the IRS, you can take the following amounts for a passenger car in 2022:
- Year 1: $19,200
- Year 2: $18,000
- Year 3: $10,800
- Year 4+: $6,460 per year
Those are huge deductions, right? Yes, they sure are. But they can't add up to more than you paid for the car. And when you sell the car, assuming you have not fully depreciated it, you basically have to give back the value of your car upon sale as depreciation recapture. The IRS also has a method of reducing your lease deduction (“inclusion amounts”) a bit to make the deduction similar to what one would get had they actually purchased the car instead of leasing it. The bottom line is that you are not penalized for buying the car, and you're not penalized for buying it with cash. The tax deduction for business autos is basically equal whether you lease, buy, or finance the car.
Incidentally, if the car weighs more than 6,000 lbs, there is no annual cap on the depreciation. You can depreciate it all in the first year. That's nice, but it doesn't change the total deduction there—just when you take it.
Lease Backs
There is one other trick. You can buy the car and then lease it to your business. Now, the deduction your business gets is precisely equal to the income that you get, so this arrangement won't change your income taxes. But it could potentially reduce payroll taxes since that self-rental income is not subject to them and your business income might be (unless you're an S Corp). You do have to use fair-market lease rates. One accountant who ran the numbers here for a sole proprietorship figured you could come out ahead doing this if you were driving less than 11,000-15,000 business miles a year, although the savings weren't more than $1,000 per year in any of the examples. I don't find the savings from this technique to be worth the effort. The juice just isn't worth the squeeze for a high-income professional. Even the accountant lists one of the benefits as:
“It seems exotic. It seems like a cool thing to drop at a party as a genius idea. But in the end, it might not be all that. But looking smart can be better than being smart.”
Who needs that? I don't. If you want something to brag about at a cocktail party, why not talk about your latest crypto purchase (or how you're shorting crypto, depending on what the crypto markets have done lately)?
Physician Car Leases
Leasing a car is still generally the most expensive way to own a car. The second-most expensive way is to buy a car and sell it every 36 months. If you can afford to turn over your cars that quickly, maybe leasing isn't so bad. It's only a little worse. I mean, you can't take the money with you. We all spend our money on stupid stuff. I might spend mine on trips to Costa Rica and gas for my wakeboat. You might spend yours on a lease or a new car every three years. So long as you're reaching your financial goals, I think it's fine.
But don't go thinking you're financially savvy for doing so. Those people at the cocktail party listening to you brag about this complex lease of yours are only nodding their heads because they're either not financially sophisticated or they're just being nice.
The Bottom Line
The personal finance gurus are right; leasing still doesn't make sense, even if the lease is deductible. If you're a doctor, lawyer, or similar high-income professional, there is little reason for your business to buy a car, much less lease one. However, you should be sure to claim your business mileage expenses if you have any. Keep a log with the date, miles, and purpose for the trip in case of an audit.
If you're writing off the entire expense of your “business car” despite putting lots of personal miles on it, you're a tax cheat and I hope you get caught.
What do you think? Do you lease or buy and why? Why do you think so many people try to justify business leases? Comment below!
Does using a EV for business miles lead to more savings? For example, could one take the mileage deduction (the $.65/mile) for EV but is not really spending nearly as much as a gas vehicle?
There’s more to mileage than gasoline. There are lots of other costs of car ownership (tires, windshield wipers, depreciation, battery replacement) so I don’t think you’re “winning” there just by using an EV.
One clarification: Is the bonus depreciation based on actual vehicle weight or the GVWR? I thought it was GVWR but I seem to be finding conflicting information online.
Our practice, a C-corp, covers several hospitals in a rural area and I regularly travel 1-2 hrs from our main hospital. I’ve always taken the IRS mileage rate (currently $0.625) but am purchasing a new vehicle and think that I would do better having my company reimburse my actual expenses. I know companies can write off actual expenses for vehicles the company owns but I’m having trouble finding anywhere that the corp. can reimburse employees for vehicles they own other than through the IRS mileage rate. Do you have any thoughts on this? If our corporation can’t reimburse my actual expenses, maybe a lease back would work in my situation.
Certainly at some price of vehicle, actual expenses are more than the mileage. My understanding is that it is about GVWR.
Good overview. Perhaps another post for how to record business miles, keep accurate/traceable log?
You can buy an app to do it or just keep it in a logbook in the car. Mileage, purpose, date. That’s all you need. Hard to blow that up into an entire post.
Great review- Thank you.
I understand home office being a grey area for most physicians even though I see it happening all around, but if you do TeleHealth from home 20-25% of the time and go to two separate clinics 2-3 days a week as 1099 for few hours- would that drive to those clinics count as commute or business miles. Would Vehicle business. deduction make sense in this?. CPA certainly call this as business miles and calls for home office deduction.
Whats your thought?
Appreciate what you do. Thank you
Did you do Telehealth before leaving home each of those days? If so, then yes, the commute is now deductible as it is between jobs in the same field.
As far as the home office deduction, that is separate from the mileage. It’s all about exclusive and regular use by the business.
Thank you. That makes sense to me. However, can I still deduct car deduction- like lease or depreciation? Essentially I have three locations of work— home for tele health , 2 clinics where I drive to , I either do tele or work at clinic s with rarely some overlap— (that overlap are business miles from what I understood)
I wish tax code was not so convoluted and easy to understand 🤪
You can deduct business expenses. Commuting is not a business expense. So the portion of your car use that is business expense you can deduct, whether using the mileage deduction or using actual expenses. Clinic to clinic is a business expense. Home to clinic is not. Tele to clinic is probably justifiable, with or without a home office deduction. Clinic to tele, same thing. But if you come home from clinic and then just eat dinner and go to bed and don’t do any tele, those miles home are not deductible.
If you think it’s convoluted now, wait until you learn about what was just signed into law yesterday. Many retirement rules just changed.
Ok. Someone has a late model exotic vehicle leased under their business llc but the business has no legitimate need for a vehicle and the vehicle is being used for 100% personal use. Somehow this person doing this can lower their taxable income by doing this which also reduces their child support and how much income taxes they pay. Is this legal?
No. Lots of people cheat on their taxes. That doesn’t make it a legit technique.
What about buying an EV through your business in order quality for the $7,500 tax credit? Would this work and does it make sense to do it?
Thanks!
You can qualify for that credit by buying the car personally, no? Why does the business need to do it? How does the fact that it is electric or that it qualifies for a tax credit change anything.
If it’s a business car and it’s going to be used by the business, sure, have the business buy it. But there a bunch of people trying to justify calling a car that is primarily for personal use a business car. That’s not okay. Whether you buy it or lease it, or whether it runs on gas, batteries, or both, you can only deduct the portion of its use actually used for business, and commuting is personal use.
By the way, that $7,500 credit goes away at an AGI of $300K.
I make too much to get credit as an individual but understood that businesses don’t have that cap (could be wrong). I love cars and may have too many already….So, one just to get me around would make slightly more sense with the tax credit.
Thanks!!!
You may be right. That might be a loophole a business could slide through. A quick search didn’t find a definitive answer.