Leasing vs Buying a car for small business write-off

Hey all, I understand this is a leasing site, but wanted to get some feedback in the lease vs buy discussion when it comes to writing off the expenses as a small business owner. I plan to start an LLC later this year, and have recently been exploring the option to write off car expenses, and was wondering what more people have had success with, or if it just comes down to personal requirements.

I wouldn’t be driving a ton for work, so I’d probably go with the Actual Expenses method, but just wanted to see if anyone had any advice, or links to other resources that I could look into.

Thanks!

So the first question is are you trying to lease the vehicle in the company’s name and split off your personal use or are you trying to lease the vehicle in your name and split off your business use?

As a small anecdote, about 6 years ago, I had a range rover that I purchased in my company’s name with myself as a cosigner. I was legitimately using it 100% for business use, so I had pretty significant write offs as a result. When it came tax time, I wrote it all off… about $1300 /mo worth, by the time you factored in all of the extras. By the time you factored in the write offs, that mean the net payment on the vehicle was roughly $500/mo (not including gas, insurance, maintenance that contributed to the write off). Probably saved me $250/mo or so total to have it in the business name.

And then I went to buy a house.

So I send all my paperwork in to the mortgage broker and immediately hit a brick wall. The effective $500/mo out of my pocket turned into about $2000/mo on paper, jacking up my DTI ratio. You see, they looked at my annual income, which was showing a $1300/mo write off and then added the $750/mo debt to it, so the car looked on paper like it was costing $2k/mo.

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I appreciate the advice!

To answer your first question, I would plan on leasing it in the company’s name and split off personal usage, which is why I was planning on going the Actual Expense route, since the mileage won’t be 100% business, so the mileage deduction would net me less.

To your second point, I had actually read about this happening a little bit, which is also why I’m leaning towards leasing and can easily wash my hands via lease transfer or just wait till the lease is up to make a big transaction, but my wife and I just bought our first home, a new construction in southern California, that we plan on being at least a 5-7yr home, so 1 or 2 3-year leases shouldn’t affect us in that regard.

But your second paragraph is the part that is interesting to me, and what I’m hoping to accomplish going this route. Would you say it was an overly cumbersome process? Or that it was worth it in the end?

Thanks!

The value is something you need to be realistic about. What percentage of your use do you expect to actually use the vehicle for business purpose? In my case, it was 100%, so it was worth it (although barely with all the house BS). If you told me you were only going to use it 10% of the time, I’d think long and hard about the amount of book keeping necessary to save $10 a month.

I think I’d be closer to the 40-50% of business usage, which is why I’m thinking Actual expenses would be a better option for me than the Standard mileage deduction, but I’ve been trying to find a calculator of sorts that would make that calculation a little bit easier.

I can easily calculate the Standard mileage deduction, as I’m assuming only about 5000 miles/yr for work mileage, the rest would be personal, which is about 40-50% of business usage. Here’s a rough calculation I came up with for the Standard mileage deduction, which isn’t a terrible savings by any means, and is definitely an option:

Keep in mind, these are just assumptions on my part, none of these are fixed values at the moment but just to give me a rough ballpark:

Car Payment ($600/mo) 7200
Gas ($100/mo) 1200
Maintenance 0
Car Wash ($50/mo) 500
Insurance ($100/mo) 1200
Total Annual Expenses 10100
Average Monthly Expenses 841

(Maintenance is a zero amount because I’m leaning BMW)

Business Miles/yr 5000
.58/mi 2875
Average Deduction/mo $239

So if I’m doing my math right, and please correct me if I’m wrong, but I’d be looking at an Average Net Monthly Payment of $602/mo after all monthly expenses, down from $841 after all monthly expenses.

Am I calculating this correctly for the Standard Mileage deduction?

Thanks!

If you pay yourself via a W2, be careful as the use of a company car results in taxable income. Also your insurance will be higher since the car is under the company’s name. You are better off buying it under personal and expense some as a business

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Don’t forget when doing the actual expense to deduct by your percent use. In this case, you’re have $10100 in annual expenses, but only be able to write off 40-50% of them, so a total write off of about $4500. That’s not going to net you $250 /mo in tax savings.

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This! I tell people all the time that this is a great way to get audited, because you really have to bifurcate the personal vs. work use, which can be hard to do. Example: friend’s family’s company pays for his car (I’ve told him a zillion times it’s compensation, but he won’t listen). He drives to and from home to work --can’t deduct that mileage. If he goes out of the way to go to the bank, either during business hours or on the way home, it is only the extra mileage to and from the bank that is for “business use,” as it is when making a delivery to a customer. If you’re trying to just deduct it under a business, it won’t fly.

<3,
@AP919 (I keep losing a post I’m in the middle of on the IAC thread if I switch accounts!)

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Please enlighten me, Unless your business has a 62% marginal tax bracket, I just don’t see how you get your numbers.

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Well on the merits you are correct. But in the real world I suspect there are many who stretch the rules to their advantage.

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It’s only illegal when you get caught, but the cheapest way to do it is buy it under your personal name and expense the business portion to your business.

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Payment on the vehicle was about $800. Add in gas, maintenance, insurance, etc and the total amount being written off was getting into the $1200 range. My LLC was set up as pass through taxing, so everything came straight off the top. 28% federal and 9% Ca taxes at the time. That’s a tax savings of about $400 a month.

Figure an extra $50-100 or so for business insurance on the vehicle vs normal leaves about $300 /mo saving.

$800-$300=$500. I was paying gas and maintenance stuff regardless, so it was a wash.

Wouldn’t the Actual cost deduction be all of the expenses listed above, but only 50%? So wouldn’t the Actual deduction be $10100 * .50 = $5050? As opposed to the Standard Mileage deduction (with 5000 business miles @ $0.575/mi) of $2875?

Or am I looking at this wrong?

Yes, correct

So wouldn’t that net me more than $250/mo in tax deductions? I’m just trying to understand the following statement:

In this case, you’re have $10100 in annual expenses, but only be able to write off 40-50% of them, so a total write off of about $4500. That’s not going to net you $250 /mo in tax savings.

~$5000 in write offs probably translates to $150/mo in net savings. Obviously tax rates vary.

Ok - It’s clear now, Your payment was $800 not($1300). Then after the taxes on that expense were removed was $500 (after tax). That’s only a marginal tax bracket of 37%. That is much more believable.

And as always other business expenses related to the vehicle were also deductable.

Correct. The total write off amount was based on payment, gas, insurance, maintenance, etc. If I was using a personal vehicle though, I’d be paying gas and maintenance. Basically only had the increased cost of the vehicle payment and the delta in insurance.

Ah, see that’s something that I wasn’t necessarily aware of. How would this calculate out?

Multiply the tax write off amount by your effective tax rate.