This blog will address the tax consequences of both leased and owned vehicles used for business purposes. Hopefully, it will offer some insight into the decision as to what is best for your business: buying or leasing?
With both owned and leased cars, any related expenses may be deducted using the standard mileage rate or the total amount of actual expenses. If the vehicle is owned, you may choose the standard mileage rate in the first year and switch to the actual expense method in a later tax year. If a vehicle is leased, you may also choose the standard mileage rate in the first year but once you the standard mileage rate is chosen, it must be used for the life of the lease.
Leased vehicles are not depreciated, but business driving costs for a leased car may be deducted, under certain circumstances and with certain limitations. A vehicle must be driven 50% or more for business purposes. Also, the actual cost method rather than the standard deduction must be used to calculate deductions in order to deduct the cost of the lease payment.
The business percentage use of a vehicle may be deducted from the total amount of lease payments. If the percentage of business use is 80%, you may deduct this same percentage of the lease payment. A higher value leased vehicle may be subject to an “inclusion amount,” which is actually a reduction in the deduction for the lease cost.
If a business owns a vehicle, it may deduct depreciation expenses at the rate in effect at the time the asset is put into service. The company may also deduct general auto expenses for business use of the vehicle, like maintenance, gasoline, and tires. If the business owns the car, personal use of the car by the employee must be documented and the company must report personal use as taxable compensation on the employee’s W-2. Interest on a vehicle loan is deductible to a business as an ordinary and necessary business expense.
When an owned business vehicle is sold, there may be taxable gain or deductible loss. The portion of any gain that is due to depreciation will be taxed as ordinary income. Of course, when a leased car is returned to the lessor, there is no taxable gain or loss.
If you are a business owner and have any questions about deductions for your business enterprise, contact THE TAX EXPERTS at the Thorgood Law Firm www.thorgoodlaw.com. For a FREE consultation, call 212-490-0704. An experienced tax professional may offer valuable assistance to any taxpayer regarding any tax issue.
