By DALIA CANTOR
The answer to this frequently asked question depends on 2 main factors - how long do you plan to keep the vehicle and how many miles do you drive per year:
- If you drive 10,000 miles per year or less and don't want to keep the car for more than 3-4 years lease could be a better option - typically lower monthly payments than a purchase option, worry free maintenance and if you use your car for business purposes, lease payments are fully deductible (percentage of business use if not 100%);
- If you drive 10,000 to 15,000 miles per year your monthly lease payment will be higher but if you tend to change cars more frequent than every 5 years lease still may be a way to go;
- Often car shoppers have a set amount of monthly payment in mind - be careful when you negotiating a lease deal - the salesman will come up with the package that will fit into your monthly budget but you will need to sacrifice either mileage or lease term that could stretch as long as 54 months in which case you might as well look into purchasing the car. Once you are in the lease you are locked in;
- If you drive a lot and tend to keep your cars for 5 years or more purchase is the best option for you. If you finance the purchase, unlike lease payments where you can take the full payment as a deduction if used for business, only the interest on the loan is deductible. However, you can depreciate your car over 5 year period. For passenger vehicles used for business depreciation limit is $11,160 for the first tax year, including bonus depreciation, and $3,160 if bonus depreciation does not apply. The limits are $5,100 for the second tax year, $3,050 for the third tax year, and $1,875 for each successive tax year;
- Look for special offers from car makers - some have excellent lease options while others offer financing as low as 1.9% APR. If you have good credit you can finance your car purchase through any bank (including your business bank) - you are not obligated to go through the financing institution that car dealers choose.
Does the vehicle have to be in the business name to take a deduction?
- If you are the business owner and the only person driving your vehicle for business the vehicle does not have to be registered in the business name in order to take a deduction;
- If you have employees that use the vehicle for business travel the vehicle has be registered under the business and you have to carry commercial auto policy for liability purposes;
- Often employees use their personal cars for business travel in which case common practice is mileage reimbursement by the employer which is deductible as a business expense.
Standard mileage or actual expense deduction?
Another frequent question to which answer depends on the amount of business miles traveled.
- IRS allows $0.535 standard deduction for each business mile driven. You have a choice of either taking actual vehicle expenses - gas, maintenance, insurance and depreciation - or a standard deduction. You are not allowed to take both and need to choose the method that is most tax advantageous;
- If you drive a lot of miles standard deduction might be higher than the actual expenses but if your vehicle is a lease, most likely your actual expenses will be greater;
- Keep in mind that if you choose to take standard mileage deduction, tolls and parking are deductible in addition to the standard deduction;
- For all business related travel you need to keep a travel log or other adequate documentation in case you get audited and need to show supporting records. I typically save my outlook calendar where I have client names, addresses and dates of travel;
- If you choose to take a standard mileage deduction you also need to keep record of your odometer reading.
Dalia Cantor, CPA, has been practicing as an accountant and tax advisor since 1997. Dalia is a member of the American Institute of Certified Public Accountants and the Florida Institute of Certified Public Accountants. Prior to establishing her own practice, Dalia worked in public accounting managing both domestic and foreign audit and tax clients. In private industry, she was involved in the regulatory environment, specializing in technical accounting, internal controls, and SEC reporting for publicly held companies. In her own firm, Dalia supports her clients with financial, tax, accounting, and advisory matters, all while delivering a personal touch. She can be reached at Dalia@mycpasolutions.com