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Dale Hammernik Advises on Whether to Lease or Buy

I’d like to explain why I spend time in these weekly notes dealing with marketing, sales and management issues — especially since my specialty (and my team’s) is cashflow, forecasting and accounting.

You see, working with small business owners over the years, I’ve discovered that you, as an owner, can often feel like you’re on your own little island. Sure, you might have your trusted staff to hash through strategy — but who’s there for you who’s willing to take a cold, objective look at the true health of your enterprise?

That’s where we come in … and further, I often discover that my clients’ financial issues don’t stem from a “financial” problem, but a *sales* problem. I.E. Fix the sales problem, and the financial problems melt away.

So yes — I’m not your normal tax preparer, that’s for sure. Based on the feedback I receive, I know you’re grateful. But I’m putting back on my “tax hat” this week to answer a question I’m constantly getting from my business owner clients.

Read on, and feel free to email us (by clicking the button at the top of this page) any questions or comments.

Dale Hammernik Advises on Whether to Lease or Buy

“The only limits are, as always, those of vision.” – James Broughton

The choice of whether to lease or buy a business car depends on many factors, and I aim to lay them all out for you.

You see, calculating the true, after-tax cost is not a simple task. Obviously, you must compare similar deals (for example, a 48-month lease and a 48-month loan for the same model car). In addition to tax considerations, you must look at factors like upfront payments, penalties in a lease contract for extra mileage or wear-and-tear, and the amount you pocket from eventually selling a car you own.

For tax purposes, you can sometimes come out ahead by leasing, especially if you drive an expensive vehicle.

The first tax consideration when buying a business car involves the “luxury” automobile depreciation rules that apply to any passenger vehicle which costs more than about $15,800 or about $17,300 for light trucks and vans.

And, of course, with the price of cars these days, most new vehicles fall into this luxury category whether you’re looking at a $19,000 Ford or a $65,000 Jaguar. So most cars fall under the special restrictions imposed on the depreciation of a luxury vehicle.

However, in an effort to help stimulate the economy, there was a new tax break in 2008. For a new passenger auto or light truck that is used more than 50 percent for business and is subject to the unfavorable luxury auto depreciation limitations, a “bonus” depreciation tax deduction greatly increased the maximum first-year write-off. (Used vehicles do not qualify for bonus depreciation.)However, as of this writing, this “bonus depreciation” does NOT apply for cars placed in service during 2015, as it was not extended at the end of December 2014 by Congress.

How can leasing sometimes be a tax saver?
When you lease a car, you can write off the portion of your monthly lease payments attributable to business driving. So if you pay $400 a month for a leased car and drive it for business 90 percent of the time, you can deduct $360 per month.

Because lease payments are partially based on the car’s expected residual value at the end of the lease period, you get to indirectly write off the car’s depreciation as part of the lease payment deductions. You’ll have to recognize an “inclusion amount” of taxable income when you lease a business car worth over about $15,800 or $17,300 for light trucks or vans. The exact calculation comes from IRS tables. The inclusion amounts are minimal compared to the limitation on depreciation deductions for a vehicle you own. So in most years, leasing may be more advantageous because it essentially allows you to bypass the annual luxury auto depreciation limits.

Still “Greek” to you? Well, let’s have a chat–we’ll take a look at your situation, and figure out your best plan.

Give us a call today: (414) 545-1890

Feel very free to share this article with a Waukesha County business associate or client you know who could benefit from our assistance — or simply send them our way? While these particular articles usually relate to business strategy, as you know, we specialize in tax preparation and planning for Waukesha County families and business owners. And we always make room for referrals from trusted sources like you.

Warmly (and until next week),

Dale Hammernik
(414) 545-1890
Hammernik & Associates