Y2K model cars speed into showrooms this month, sparking a burning question: Should you buy or lease your business car? Leasing may be the more affordable avenue, but it leaves you with nothing at lease-end. Tax implications may help you determine which alternative is best.
If you buy a car and use it for business purposes, you may recover part of its cost through annual depreciation. The amount, however, depends on the method of depreciation used, the cost of the car, the year it's placed in service and the percentage of total mileage that's for business. For cars used more than half the time for business, an alternative to the common deduction (the Modified Accelerated Cost Recovery System, or MACRS) is the expensing deduction (Section 179 of the Internal Revenue Code), which replaces depreciation the first year, according to the American Institute of Certified Public Accountants (AICPA). Any part of the vehicle cost not recovered through first-year expensing can be recovered through depreciation deductions in subsequent years, the AICPA notes.
Both methods cap first-year new car deductions at $3,160--less if the vehicle is used outside the business. For example, if you use your car 60 percent of the time for business, your maximum deduction is 60 percent of $3,160, or $1,896.
Leasing, on the other hand, allows you to deduct a portion of your lease payment plus other operating costs attributable to business. That is, if the car is used for business 90 percent of the time, you may write off 90 percent of your payments. However, the AICPA points out, you may be subject to an "inclusion amount" each year. This inclusion amount, which is added to your other income, applies if the car is leased more than 30 days and costs more than $15,800.
In the final analysis, it's important to run the numbers to determine whether buying or leasing is best for your situation--taking into account both tax and nontax considerations. Whatever you do, don't let the lure of snazzy new wheels dim your judgment. If you think you need help making your decision, consider talking to an accountant or other tax professional--their expertise and objectivity will surely steer you in the right direction.
Paul De Ceglie (MrWritePDC@aol.com) is a former staff reporter for Journal of Commerce and American Banker.