Should I Buy or Lease a Car for my Business?

hey everyone mr. CPA here and in this video I'm going to talk to you about a question that I get asked pretty frequently which is about whether you should buy or lease a vehicle for your business now there's a lot of you know philosophies school of thought out there I have my own opinions on it and so that's what I'm gonna cover here but also a couple things you know first make sure this beat this vehicle that you're gonna purchase for your business is titled to the business that's very important because the IRS doesn't particularly like if you're just taking your personal vehicle and writing it off against your business and not really going through the procedure to have the business own the vehicle and be responsible for including the insurance and the payments and everything the second thing to know is that if you're a business owner and you only own one vehicle and you're thinking about writing that off against your business you might want to reconsider you know let's take the IRS this perspective on this you only have one vehicle they know that you're likely using it for business and personal and you can do that you can certainly depreciate or have the business on a portion of the vehicle but if you're thinking you're going to take one vehicle and just make the whole thing deductible against the business that's probably that's probably not going to fly you know rare exceptions would be if you live in Chicago New York San Francisco big cities where maybe mass transit is customary you can make that argument you can show proof that hey I'm taking the subway system everywhere but my business needs this vehicle because the delivery service or something that might make a little bit more sense but when there's an opportunity for you to use this vehicle personally and the business owns it you just want to be careful that you're not over overstepping the line with writing this off against your business so we're going to go through two examples here and I hope that you can get some value out of this and helps clarify whether you should purchase a vehicle or lease a vehicle for your business so let's jump into it so we're going to talk about two examples one's gonna be a car purchase one's gonna be a car lease and in order to establish our problem we have to come up with some assumptions so first we'll talk about the assumptions for the car purchase the price of the vehicle is $20,000 it's financed over five years the vehicles the vehicle will be used 100 percent by the business qualifies for bonus depreciation zero percent Interest loan and we're just doing that for simplicity and the vehicles put in service on the first day of 2019 which is the year that this video was recorded the second example you've got car lease so we've got these payments are four hundred fifty dollars per month the lease term is five years the vehicle will be used 100% by the business and it was also put in service on the first day of 2019 so these are your assumptions and so we're gonna hop over to the car purchase and we're going to talk through that so up top you've got your factors the first day of 2019 your purchase price is twenty thousand dollars your finance term is five years which results in a three hundred thirty three dollars and 33 cents per month payment with a four thousand dollar annual payment and so in year one if you bought a car you most likely are going to be able to depreciate it eighteen thousand dollars and that's just right off the top that's bonus depreciation that's assuming that that this vehicle meets all those criteria and you absolutely would go through that exercise to make sure that your business vehicle purchase will meet those that criteria and then to boot you get depreciation on top of the bonus depreciation so whatever is left over which in this case would be twenty thousand minus eighteen thousand you're gonna have two thousand dollars left to depreciate well you'll use the makers double declining straight-line double declining depreciation rate over five years you're gonna get to write off 800 in the first year so in your first year you're getting a tax deduction of eighteen thousand eight hundred dollars which is huge considering you just went out and spent twenty thousand dollars on a car and and here's the beautiful thing in this example you're financing in so you're only had a pocket four grand you got to take a write-off for eighteen thousand eight hundred years two through five not as pretty I didn't work out each year but the depreciation would only total twelve hundred dollars and those payments unfortunately would stay at four thousand dollars per year so you're really front-loading all of the tax benefit here and there's nothing wrong with that really gonna probably play to your benefit because you're gonna be able to redeploy the tax savings into your business so you see here your total write-off over the five-year period will still come out to be twenty thousand dollars but I think the most important thing here to know is that not only do you get to write the car off but you get to keep it when the term is over when the five years is up so if you choose wisely and you maintain this vehicle really well you will be able to get more value out of it long term because you won't have payments against it and even though it's fully depreciated and you're not getting a tax write-off just remember we never want to spend a dollar to save a quarter that doesn't make a lot of sense so you get to keep this vehicle here we've got the car lease and again you've got at least on one 119 the term is five years we assumed payments of $450 per month and that would amount to about 5,400 annually and why I did that was because most the time car leases are greater than what it would cost to buy a vehicle so if I go out on the lot and I want to buy a new vehicle or if I want to lease a new vehicle more often than not that lease rate is higher and it's just it's just a gimmick you know you might get a you might get a fancier version of the same car might come with more bells and whistles do you really need all that you know you really gotta ask yourself that question and even if you want to bring the math back down to what we were at before the $20,000 you'll still see by the time this example is over why that may still not make sense but we'll just assume that the lease rate is actually higher so your payment annually in year one it's gonna be fifty four hundred dollars it's your only write-off the only thing you can write off are the lease payments you don't get any ownership of the vehicle so you can't depreciate it you can only write off the maintenance and the fuel and the lease payments and by the way if your business owns your other owns the vehicle you also get to write off the maintenance and the fuel and all that the insurance in that example as well so that those are kind of we're kind of holding steady on both sides of the equation they're yours two through five again there's no depreciation in ceará you cannot depreciate a leased vehicle but you'll have lease payments of twenty-one thousand six hundred so what this would do is actually split up your write-off equivalently over the five year period so because there's four hundred and fifty dollar payments for five years your total write-off here would actually be hired be twenty seven thousand dollars but again begs the question what I spent a dollar to save a quarter I'm spending seven thousand extra dollars in this example and and like I said even if we were to bring it back down to reality or to a lower level and say this payments going to be the same as the purchase payment sub in 20,000 instead of 27,000 you have to turn this car in at the end of the term or you have to pay extra if you want to keep it so you already paid them to rent their car for five years now you have to turn around and pay money to take ownership of it seems like they're double dipping that's why I'm not a fan of leases and that's why I find that buying a car is almost always a better economic proposition I can't say that it always is there are very rare cases where it might make sense but buying a car is almost always your better proposition especially with that first year bonus depreciation and being able to possibly write-off the majority of the vehicle all at once you could really benefit by purchasing a vehicle taking care of it making sure that you get more than that five year life out of it which is the IRS is standard for writing off vehicles by the way you really you really could benefit long-term so I'm not going to tell you that one better suit you than the other other but if you approach me and you ask me I'm probably going to tell you that buying a vehicle is the better option here so that's the example that I have for you and so it looks like purchasing a vehicle would actually benefit you a little bit more now something that I mentioned in the presentation was that maintenance repairs fuel insurance things like that are deductible for both circumstances so if your business owns a vehicle it's absolutely entitled to take all of those right offs similarly if you lease a vehicle same deal there would be no difference from an ownership release perspective that's why I didn't really cook that into the example but you should know that as a viewer you can deduct those those types of expenses in both cases something else that we didn't talk about would be the section 179 depreciation and that's I think a conversation for another day or another video rather but there are circumstances where you can take bonus depreciation you can put section 179 on top of it and you know there are cases we need to go out buy a fifty sixty thousand dollar vehicle and write the whole thing off on one shot and then in that case you know when you're bumping that up against the lease I think you're really gonna I think you're really gonna see the benefit especially if you're if you're getting a $20,000 let's say refund or right you know tax tax effective rebate on your on your taxes you're probably going to air over to the purchase side of things so I hope this video has been helpful for you to determine whether you should buy or at lease a vehicle for your business it's kind of the process in a nutshell as I mentioned it's not necessarily the case 100% of the time but it's my personal and professional opinion that purchasing far outweighs the benefit of leasing so if you're if you're in the market for a new business vehicle make sure that you kind of crunch the numbers on both sides if you know anyone that could benefit from these videos or from this video please feel free to share it on social media send your friends family members mob business peers anyone you know who could benefit from the help just send them my way we'd love for them to participate in the viewership of these videos all right thanks so much

Channel: Mr. CPA

Views: 31,638

Keywords: buy or lease a car, leasing a car, buy a car, business car, should i buy a car for my business, should i lease a car for my business, can my business buy a car, can my business lease a car, mr cpa, car lease vs buy, buy car vs lease, can i write off a car on my business, is my car a deductible business expenses, is a car lease tax deductible, can a business own a car, can a business write off a car, can a business lease a car, should i buy or lease a car for my business

Id: eJFz1HykZ6M

Length: 12min 56sec (776 seconds)

Published: Wed Jun 19 2019