Leasing a car is often a necessity for business owners for carrying out their operations, whether they are just starting out or aiming to grow their venture to the next level. You can make the best decision about leasing your car to your business by focusing on your business’s current financial condition, and purpose of a vehicle, and what level of ownership you seek. Visit eAutoLease.com to learn more about leasing benefits for business and how you can make the right decision for your needs.
A business expense 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 don’t pay payroll taxes, federal or state income tax on that money. It is truly pre-tax money.
If you are a business owner, you have to decide whether your business should own a car or lease it. Any expense other than personal should be taken as a business expense and addressed as the same.
How to Deduct Car-Related Expenses
Most people fail to understand how car-related expenses work when it comes to taxes. As the year comes to an end, you add up all the expenses of running that car. Then you add up the total mileage you have driven in the year with all the business mileage you had during the year.
You can divide the business mileage by the total mileage and then multiply it by the total expenses, and that’s your deduction. Total expense × business mileage/total mileage = Business mileage deduction
There is also another, simple alternative to deduct expenses, known as the standard mileage deduction, which is 62.5 cents per business mile driven. You will have to choose one. 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, more expensive, or leased car. Running the numbers both ways can help you find the best option.
Remember, interest on a car loan is deductible, but the principal portion of the payment is not. The entire lease payment is most deductible. You must realize that only business mileage is deductible. Commuting from home to your job or for any other personal tasks are not counted as business miles.
Read more: Selling A Leased Car
Leasing a Car for Your Business
From a tax perspective, it does not matter if you lease a car for your business or buy it or choose to buy or lease it personally. If the business owns a car, you can deduct the business mileage or the percentage of the expenses used for the business. On the other hand, if you own it, you can deduct the business mileage or the percentage of the expenses used for business miles. It is the same thing.
The two important considerations in this regard are insurance and income.
Income
If your business is leasing a car, it is up to you to figure out a way to deal with personal miles. Personal use of a company vehicle, including to and from work, is a taxable business perk and must be reported as income to the employee at least once a year. While the tax outcome is pretty much the same here, just like you owned the car, it is not easy to keep track of all this for your business and report it. It is far more convenient to just add up the business mileage.
The right thing to do in this regard would be to own or lease the car and take a business mileage deduction for the business miles as long as the insurance is covering the business use. If your insurance company is not willing to do it, find another one, and you will be better off. It will simplify things even if it may not minimize your tax bill.
Leasing or Owning Your Business Car – Which Option is Better?
In the long run, owning a car is a better financial move than renting or leasing it. The longer you have a car and use it, the better it will work out for you. Renting may be a feasible option for the short term particularly if you are visiting a place or drive occasionally, but if you want it for a long, it is best to make other arrangements, such as leasing or buying.
It is up to you to identify and analyze your needs and make a better choice. Depending on your business needs as well as your financial situation, and look forward to saving some money.
Read more: Yes, You Can Lease a Used Car — Here’s How to Do It
Depreciation – is it a Car Expense?
Depreciation is an accounting method used to allocate the cost of a tangible or physical asset over its useful life. It represents the estimated reduction in the value of fixed assets within a fiscal year.
The total amount of depreciation 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. Due to the additional depreciation laws, you can take quite a bit of it early.
According to the IRS, you could 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
These are huge deductions, but they cannot add up to more than you paid for the car. When you sell the car, if you have not depreciated it, you 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 a bit to make the deduction similar to what one would get had they actually purchased the car instead of leasing it. The tax deduction for business autos is basically equal whether you lease, buy, or finance the car. There is no penalty whether you buy the car for cash.
Read more: What To Know Before Leasing a Car for Business
Leaseback
Another way to do it right is by buying the car and then leasing it to your business. In this situation, the deduction your business gets is equal to the income that you get and this arrangement will not charge you any income taxes. However, it could reduce payroll taxes as that self-rental income is not subject to them, and your business income might be. You will have to use fair market lease rates as well.
According to an expert, you could come out ahead doing this if you drive less than 11,000-15,000 business miles a year, even though the savings are not more than $1,000 per year. If you look carefully, saving this may not be worth the effort.
Despite the benefits its offers, leasing is still the most expensive way to get a car. The second more expensive way is to buy a car and sell it every 36 months. If you can afford to turn over your cars that quickly and enjoy doing it, leasing may not be so bad. As long as you are reaching your financial goals, things should work out well for you.
If you are running a business and want to save some money, leasing a car may be a good option for you. Leasing gives you tax advantages with adequate recordkeeping, and you can use standard or actual cost methods to deduct things such as mileage, lease payments, gas, and repair. eAutoLease.com helps you understand leasing better and how you can make things works by leasing your car to a business.
