Let me preface this by saying that I am pretty familiar with the tax code and IRS rules and I am also pretty familiar with how leases work. What I cannot understand is how some people think that because they are self employed or own a business, they are driving around in their leased BMW for free. Is it just shady accounting, or something more?
Let’s throw some rough numbers at it and see where I am wrong. Assumptions: You lease a BMW 7 Series for $900 a month. Let’s say you are in a 33.3% tax bracket. Let’s also say you use your BMW for 1/3 business and 2/3 personal use. After all, unless you are in sales or using the car for advertising your BMW parts business (and even then I don’t see it being 100%) it will not be much more than that.
First month of your business, you make $900. Your only expense is the BMW, which you can use to deduct $300, leaving you with $600 in taxable income. Your tax rate is 1/3 in both cases (to keep it simple). So your taxes without the BMW are $300 and you taxes with the BMW are $200.
In short you are paying $900 a month to save $100 a month on taxes. So your BMW is now $800 a month if you prefer. Not a huge difference. What am I missing?
I guess if I was planning to lease a 7 series anyway, and can also save $100 a month, then why not. But if someone got a 7 series just for the tax savings, then yeah I would agree with your assessment. I don’t have a business so I can’t comment on whether your numbers/assumptions are right/wrong.
It doesn’t make the car free, but there is something to be said regarding writing off some of the payment compared to none of it. Also, the insurance cost can be a significant factor.
I am talking about the people who spring up on every “lease vs. buy” thread on every car forum ever and say “Well, I have a business, so I can write it off.” That may be true, but it doesn’t make a bad lease deal good, unless I am missing something. Hence my question.
I think there often is shady accounting involved. I used to go to a bagel store/factory, and there usually were three high end ($80K plus) cars parked there, with personalized license plates with a variation of the name of the company. I would not be surprised if the cars were written off as a company expense, even though I doubt a bagel was ever delivered anywhere in one. I suspect there were essentially the owners’ personal cars, but were treated as business assets for tax purposes.
This has been discussed many times if you search, eg
Which really isn’t the case either. Others have mentioned, you need to use it enough for business to be eligible to deduct it at all. In your example, you have to make enough money to pay your taxes before the lease/insurance/gas/maintenance.
I run into people all the time who created an LLC and leased, expecting to write it off, until they realized they couldn’t for any number of reasons.
I also meet a lot of people whose company have car allowances and lease them a car, C corps who take it as an expense. The answer is always, it depends.
If you search “business lease” there are 3+ decent threads, plenty of “lease vs buy” (I usually search Section 179 for those). People ask if they can all the time.
To your point: a lot of people claim to write off their lease as a business expense. Some don’t, some tried and failed, some cheat on their taxes (and are waiting to get caught), and some do it legitimately. The rules change often enough that it’s always a question for your accountant - not something I would do myself, unsupervised.
I find most people creating an LLC to write off their car lease are usually pre-CPA, living the Turbo Tax life (no shade), and want someone on the Internet to tell them “YOLO”, which is latin for “IRS pay plans go on until you die”.
You are pretty much spot on and I give a similar example to friends and acquaintances quite regularly. A lot of people seriously think they are smarter than the taxman.
Maybe business returns are different, but I understand that the IRS only audits about 1 in 200 personal tax returns. So you do not really have much to fear from the taxman, which is why some folks get aggressive on their taxes. Some famous Bozo (aka ex-President) allegedly wrote off a billion dollar loss that he did not actually incur, got away with it, and now brags about how it shows how smart he is.
