ACCOUNTANT EXPLAINS: Should You Buy, Lease or Finance New Car?

okay should you buy or lease your business vehicle i'm excited to dig in and talk about it because if you are self-employed or have a small business then you can take advantage of what is known as the vehicle tax deduction which essentially allows you to write off your car your suv your truck or whatever else you may drive for business purposes now i currently have a 2020 tesla model 3 that i write off for business purposes as well and i'll reveal how i decided whether or not to lease or buy my own vehicle as well as the tax methods that i use but overall in this video what i want to do is give you a solid guide so that you can run the numbers and compare for yourself if you should buy versus least a car for business i'll go over how to qualify for the vehicle tax deductions the two methods to deduct a vehicle and the most important factors to consider along with some math and calculations along the way so if you are as excited as me to dive in then please do me a huge favor and hit the like button for the youtube algorithm so more people like you can find this video stay tuned [Music] hey there and if you're new welcome to our channel i'm sean with life accounting the accounting company that helps you save on taxes and build more wealth and as always what i'm going to do is put the timestamps for this video down in the description below so that you can skip to the parts that you want to learn the most about but i do think this video will give you a ton of value if you watch it from start to finish okay let's go ahead and set the scene and quickly talk about number one the difference between buying versus leasing a vehicle now while buying a car or leasing a car can be a mathematical numbers and sense decision there is still a personal preference component to it as well so let's do a side by side comparison in the first category we have ownership because of course when you buy a vehicle it is yours forever right like you don't have to give it back and you may also feel a sense of pride knowing you have ownership or you may even experience more financial security because even though vehicles are fast appreciating assets guess what they are still assets which you can later sell for some value on the other side when you lease a vehicle you must return it or renew your lease if you want to keep the car so you don't have an asset that you can later sell however with leasing you're not stuck with the same old car year after year after year and you can benefit from driving something new more often in the next category we have control which is closely related to ownership because when you own your vehicle then you basically can do what you want to do with it right like you can sell it anytime you want to you can trade it in any time you want to whereas with lease agreements you may face an early termination penalty if you decide you don't want to use the car anymore also leasing companies force you to pay for repairs beyond any normal wear and tear whereas if you own a car then maybe you want to care about having a few scratches on the side or on a windshield along with control you have customization which means that you can modify the vehicle right like if you own it or buy it then you can change the color you can add a logo you can do whatever you want whereas with lease agreements you can't really make any modifications to the vehicle and if you do then you better reverse them before returning your vehicle because that's typically not allowed within leases the next big difference to consider are payments and i'm not going to get too deep into the math yet but i do want to call out this as another personal preference because when you buy a car you can reach a point where you get rid of all your monthly payments usually after 60 to 72 months and you may have a personal value associated with minimizing risk and paying off debt and having low monthly expenses which is also something to consider of course on the other hand when you are leasing a car then you will always live with a car payment for as long as you decide to lease but here's the thing okay generally when you are leasing a car you have less maintenance as well which saves you time and money from having to make all these types of repairs to an older car okay so after going through all of this side by side it's easy super easy to see why most americans prefer to own their vehicles instead of lease them because you have ownership you have control and you could have less expenses long term now i want you to tell me in the comment section below if you think it is smarter to lease or buy a car after you finish this video i'm super curious because the truth is it can make more financial sense and bring more value to you by leasing a car for tax purposes so let's go ahead and talk about number two how to qualify for the vehicle tax deduction okay i mentioned this in the intro but if it's not clear let me go ahead and make it crystal clear if you want to write off a car then number one you must first be self-employed or own a business hey sean look i can write off a car in my youtube videos okay because look you must use the schedule c form if you are the sole owner of a company or file a business tax return like the 1065 or 1120 to even find the vehicle tax deduction area okay and it's not enough to just have a business and write off a car because number two your vehicle must be used for business purposes for example you can't just take a car and write it off 100 and then take personal trips to the grocery store or to the gym right like that is not a business purpose of course unless that is your business and that's important because there are many court cases that rule against taxpayers when they lack intentional business purposes then the third test you need to make sure you can pass is that the vehicle has an ordinary and necessary use for your business okay ordinary typically means that it is a type of expense or vehicle that is commonly seen in your industry or in your specific line of work and necessary means that it is the type of expense or vehicle that is necessary almost required in order for your business to operate for example if you own something like a pizza restaurant then you may want to do something like buy cars for your delivery drivers but it may be a little sketch if your drivers are pulling up in teslas and porsches to deliver pizza right like that's not ordinary for most restaurants so once you check all of those boxes okay you have a business you have a business use and it is ordinary and necessary then it's safe to say that you can qualify for the vehicle tax deduction now let's talk about number three the two methods to write off a vehicle now it's important to talk about the two methods to write off a vehicle because this is where some of the nuances come into play when you are trying to decide whether or not you should release or buy a business vehicle now the first method to use is called the standard mileage rate now this is one of the easiest methods of the two and it generally applies to people who currently own a car and we'll talk about why shortly but first let me explain what it is so the standard mileage method simply takes a standard mileage rate that the irs issues every year which for 2022 is 58.5 cents per mile and you use this rate to arrive at your tax deduction for example if you drive ten thousand miles for business then you could deduct five thousand eight hundred and fifty dollars from your income which is ten thousand times fifty eight point five cents per mile the second method to write off a car is called the actual expense method now this can be used for any vehicle whether you currently own it buy it or lease it because with the actual expense method you can itemize all your vehicle expenses such as writing off your title license and registration fees your auto insurance policies your oil and gas or your electricity if you have an ev car your repairs and maintenance your car washes and a big one you can write off depreciation lease payments or your auto loan interest payments now the last one is really important note because you can write off auto loan interest not auto loan payments okay big difference there now here's how the numbers work on the actual expense method first of all you can only write off the percentage that is being used for business so let's say for example you have a vehicle and fifty percent is being used for business and the other fifty percent is being used for personal use and you had ten thousand dollars in vehicle expenses well in this case you would take your total expenses multiplied by fifty percent to get a five thousand dollar tax deduction okay now that you understand those two methods let's go ahead and get into some factors that may help your decision but look at the end of the day the question of should you buy or lease a business vehicle is entirely based on individual circumstances but some of the factors that i'm going to cover should help you out or at least understand and guide you in making your own decision starting with number one cash flow look starting and running a business can be very difficult and require a lot of capital and buying a vehicle may require a significant down payment of 10 or 20 percent so if you are in the startup or growth phase of your business where you are making other critical business investments then you may want to consider leasing a vehicle to maintain positive cash flow because that would allow you to have lower monthly payments compared to cars of similar quality that you would need to buy in fact maintenance is often included with your lease and you can still write off lease payments and mileage as well and the math on that is pretty simple right so for example if you buy a forty thousand dollar vehicle then you could have a ten percent down payment of four thousand dollars in a monthly payment of six hundred and seventy dollars a month whereas if you lease the vehicle you wouldn't have any down payment at all so you save four thousand dollars and you can have a lower payment of five hundred and forty one dollars per month and over 60 months you would actually pay 16 000 less for owning or having that vehicle now of course this is a short-term benefit purely for maintaining healthy cash flow let's go ahead and look at the next factor number two taxes and depreciation so regardless of if you lease or buy your vehicle the good news is you can still qualify for the vehicle tax deduction the question you need to ask yourself is how big of a deduction are you going to get and a big factor in that is taking depreciation and look i love depreciation because it's one of the few tax deductions where you can report a loss on paper even if you had a positive return and you can take depreciation on most business assets including a business vehicle but here's the thing okay it must be a business asset in other words you must own the vehicle now there are also two main ways to take depreciation you can do the straight line depreciation method where you take a little bit of depreciation every year usually up to five years so you get a small but very consistent tax deduction or you can use bonus depreciation or section 179 depreciation where you take the majority of your depreciation in year one in this way you get a bigger tax deduction in one year but then much lower depreciation in subsequent years for example let's say you forecast 100 000 in business profit so you decide to get a 40 000 vehicle used 100 for business and you anticipate you may drive 20 000 miles throughout the tax year where here are four potential tax outcomes under the standard mileage rate you would have an additional eleven thousand seven hundred dollar tax deduction which is twenty thousand miles times fifty eight point five cents per mile if you leased a vehicle then under the actual expense method we'd have to itemize the estimated cost so let's say that you have something like 3 500 on gas expenses because gas is very pricey right now two thousand dollars on repairs and maintenance three thousand dollars on auto loan insurance and sixty five hundred dollars in total annual lease payments for a total tax deduction of fifteen thousand dollars and if you own a vehicle then under the same actual expense method you have the same cost except now you could use the straight line depreciation method and that will get you an estimated 7 800 depreciation deduction but also you'd have to take away the lease payments which makes for a total tax deduction of sixteen thousand three hundred dollars but heck you could take depreciation further and potentially use bonus depreciation or section 179 depreciation to write off the total expense of the vehicle in year one especially if it is over six thousand pounds to get a total tax deduction of forty eight thousand five hundred dollars now i do wanna reiterate that all of these numbers are hypothetical and obviously will change based on the vehicle that you buy your own interest rate your lease payments and many other variables however i hope this conveys the point that there are different tax outcomes based on if you decide to lease or buy your vehicle and there are different tax methods to choose from and of course i am oversimplifying here because the rules around depreciation are much more complicated but you can watch my video on how to write off your dream car to get a better understanding which i'll link at the end of this video or you can tell me in the comment section below if you want to see me make a video all about depreciation so the big factor to consider here is how big of a tax deduction you want because obviously you don't want a huge tax deduction if you have very little business profits or very little taxable income and it may not be necessary for you to do so anyway just like it can make sense to lease a vehicle in the short term it can also make sense to own a vehicle in the long term because owning a vehicle allows you to bring your vehicle expenses down to zero which can be very healthy for your long term business growth also remember buying or leasing a car is a personal decision maybe this is a vehicle you want to use for other personal purposes or transfer it to another business or even pass it down to someone else all of this should help you get more clarity on whether or not you want to lease or own your vehicle now here was my thought process when i bought the 2020 tesla model 3 so i already had a healthy cash flow so i didn't anticipate needing cash for other business investments or operation costs so long term it made more sense for me to own than lease financially plus i'm not really a big car guy so that completely rolled out leasing for me at the same time i already had a number of different tax strategies and tax deductions working for me so i also didn't need a huge tax deduction either so taking bonus depreciation wasn't necessary so the fact that the tesla model 3 wasn't over 6 000 pounds didn't bother me so that just basically left me between using the actual expense method or taking the standard mileage deduction rate and i prefer the actual expense method because i don't drive a lot in general and it would give me a bigger tax deduction okay now since you made it this far i have one bonus tip for you which is how you can deduct business trips from your home so on one of my last videos about how to write off your dream car someone in the comment section was pointing out the fact that you can't write off your commutes from your home and there's a q a on h r blocks website that pretty much says you also cannot deduct commutes so i wanted to make sure i addressed that for anyone else who may be wondering the same thing or just thinking along the same lines okay so here's the deal according to the irs website you can in fact deduct commutes from your primary or your dedicated office space to other temporary work locations so if you want to write off business mileage or business use to and from your home then you would also want to make sure your home is your dedicated office space and your primary work location that way when you drive to other business locations it can be considered a commute back and forth to your office instead of your personal residence okay so i hope you enjoyed that bonus and hey don't forget to tell me in the comment section below if you would buy or lease your vehicle coming up next i have two more videos that you may enjoy as well so make sure you check those out if you haven't already and i'll see you over there

Channel: LYFE Accounting

Views: 34,683

Keywords:

Id: 0r1Yh5M5Nxo

Length: 17min 23sec (1043 seconds)

Published: Sat Apr 09 2022