Starting a Business Category
I get asked this question A LOT. Especially for service based businesses. There is confusion between Leasing and Buying, whether or not to get the car personally or through the business entity, and what kind of car to buy. Hopefully I will clear this up.
1) Leasing vs Buying
Simple Answer: Buy a vehicle: you usually get a slight tax advantage over leasing. Though if you typically turn over cars every three years, get a lease if only for the reason that a lease was designed for that sort of thing.
Categories used for Calculation of tax savings
- Buying – able to deduct up to the percentage used for business (for example 20% personal and commuting, 80% business – 80% of each of the below would be deductible):
- Depreciation (purchase price spread out over 5 years)
- Interest paid on car loan
- Leasing – Able to deduct up to the percentage used for business (Same as Buying):
- Lease Payments
- Standard Mileage Deduction of “business miles driven” = .56 cents per mile
Calculation of Tax Savings
Lets assume that the SAME mileage is driven regardless of which we choose. In that case, only Depreciation, Interest and lease payments will vary. Lets also assume that the car price is $35,000 at 5% interest, and the lease monthly payment is $575 based on an online calculator using a standard residual and no down payment.
- Depreciation: $6,000 (average over 3 years)(FYI this may change for 2014)
- Interest Paid: $1,750
- Total: $7,750
- Lease Payments: $6,900
- $850 – Buying Wins!!
Although it is a small difference, buying always tends to beat out leasing by a small margin strictly from a tax benefit standpoint.
2) Should I buy the car under the business?
Simple answer: No, there is no tax advantage to doing this.
Complex Answer: No, unless you are planning on having an employee drive the car more than 50% of the time and it will be used 100% for business reasons. There is no tax advantage for buying a car through your business since the IRS allows you to bring personally owned cars into your business by using a “percentage of business use” model.
If you are having employees drive the cars, or it is used as a delivery vehicle, then you will need commercial insurance and an added layer of legal protection. By registering the vehicle as commercial, and getting commercial insurance, you can accomplish this. Otherwise it is just a total pain to do. If you mainly drive the car, I would recommend skipping this step.
3) Is there a tax advantage depending on what kind of vehicle I buy?
Simple Answer: Yes. typically trucks over certain weight limits allow an immediate tax benefit.
- Cars and Trucks under 6,000 pounds are typically depreciated over 5 year and use a complex method of determining this. There is no ability to accelerate that depreciation. beyond the current maximum $11,160 (2013 for a $22,000+ vehicle).
- Trucks over $6,000 pounds allow a Section 179 deduction of up to $25,000 in the first year.
- Trucks with an open bed, and are over 12,000 pounds allow a FULL Section 179 deduction for the purchase price (If you buy the vehicle for $40,000, you can take that as a first year deduction if you use it 100% for business)
Really, I would only recommend buying a big truck if you can actually use it for business, otherwise the cost really does not justify the expense.
Hopefully that clears up the Buy vs Lease conundrum. I have to admit, that this information is subject to change based on changes in the laws regarding Bonus Depreciation, Section 280F Luxury care limitations, and Section 179 deductions. I will try and update this page as those changes happen, but assume this is all for 2013 for now.
My firm now offers a monthly CFO Package, in this package I am offering the following services included at NO Additional cost:
- 1 hour of consulting per month ($175 monthly value)
- Annual Tax Return Preparation for the Business ($100+ monthly Value)
- Monthly Bookkeeping and Reconciliation with Reports ($175+ monthly value)
- Payroll for Employees and Contractors ($125+ monthly value)
- 1099 reporting ($25+ monthly Value)
- Yearly Financial Analysis and Planning ($30+ monthly value)
- Total Monthly Value = $630+
- Annual Savings = $2,460+
The plans including all of the above start at $425 per month per company. For additional companies (same owner) I will have to come up with a custom quote. If your company processes more than 300 transactions per month, or has revenue above $500,000 per year, I may need to raise the price slightly due to the extra work involved with payroll, bookkeeping and annual reporting.
If a full package is too much for you, I also offer a simple bookkeeping package starting at $150 per month.
Contact me for more details.