As a single member LLC - what are the pros and cons of buying and/or leasing a company vehicle? Is it better to claim mileage for business miles driven in personal vehicle?
Thank you for posting a question in our TurboTax Live! ask the experts event!! We see that you have a question about car buying v. car leasing.
Buying or Leasing a car is exciting; and it is good to check on your options for any tax implications of either of these scenarios. In terms of tax strategy - generally speaking, the same tax rules apply for buying a car v. leasing a car, meaning that you can still deduct business mileage - for miles driven for business purposes - at the standard federal mileage rate. You also will answer the questions in TurboTax Live! interview - and the TurboTax will determine whether the business mileage or the actual expenses during the year - provide you with a better deduction.
You can also deduct - for your vehicle purchase or lease:
1. Car and truck expenses: You can report these costs in one of two ways: Enter your actual expenses—for gas, oil changes, repairs, insurance, etc.—if you have supporting documentation, or take the IRS standard mileage rate. The rate for 2021 is 56 cents per mile.
2. Depreciation and Section 179 expense deduction: The law allows businesses to depreciate—or gradually deduct the cost of —assets such as equipment, fixtures, furniture, etc., that will last more than one year. For these assets, you first fill out Form 4562: Depreciation and Amortization, and enter the result on Schedule C.
You also use Form 4562 if you elect the Section 179 "expensing" deduction. Section 179 lets you deduct the full cost of assets (both new and used) in the year they are placed in service, subject to certain limits.
3. Bonus Depreciation: Bonus depreciation has been changed for qualified assets acquired and placed in service after September 27, 2017. For qualified assets that were purchased new before September 28, 2017, the old rules of 50% bonus depreciation still apply. The new rules allow for 100% bonus "expensing" of assets that are new or used.
The percentage of bonus depreciation phases down in the year:
- 2023 to 80%
- 2024 to 60%
- 2025 to 40%
- 2026 to 20%.
After 2026 there is no further bonus depreciation. This bonus "expensing" should not be confused with expensing under Code Section 179 which has entirely separate rules, see above.
The 100% expensing is also available for certain productions, such as qualified film, television, and live staged performances, and certain fruit or nuts planted or grafted after September 27, 2017.
50% bonus first year depreciation can be elected over the 100% expensing for the first tax year ending after September 27, 2017.
But - to answer your question fully, you should consider the tax implications - along with the other financial considerations that a new vehicle (whether purchased or leased) can bring into focus!!!
As with most decisions in life, taxes should only be one of the considerations. Here are a few of the non-tax considerations on buying or leasing a business vehicle:
- Number of miles your drive each year: leased cars often charged extra fees for miles driven over 10,000 or 12,000/year.
- How long you keep a car: do you get a new car every 3-4 years or keep it until its junk?
- How much do you want to spend on your monthly payments: lease payments are usually quite a bit less than monthly payments on car loan.
Now let’s talk about the tax benefits for the self-employed taxpayer and his or her car used for business. With both purchased and leased cars, you can deduct the related expenses by using the standard mileage rate or actual expenses.
Note: If you own the vehicle, you can choose the standard mileage rate in the first year and switch to the actual expense method in a later year if it becomes more favorable.
If you lease a vehicle, you may also choose the standard mileage rate in the first year, but once you use the standard mileage rate you must use it for the life of the lease.
With the standard mileage rate, your business mile deduction will be based on 56 cents per mile for 2021.
For tax year 2021, the Standard Mileage rate is 56 cents/mile. Carrying through the example above: 5,000 business miles x $0.56 standard rate = $2,800 Standard Mileage deduction.
You can also deduct business-related parking fees and tolls.
For the purchased vehicle, you may also be able to deduct a portion of the interest on your car loan. Under the actual expense rules, for both leased and purchased vehicles, you can deduct the business percentage of your gasoline, oil, insurance, garage rent, parking & registration fees, lease or rental fees, repairs, tires, loan interest, etc.
Purchased vs. Leased Vehicle Expenses
Some expenses differ between purchased and leased vehicles using the actual expense rules, and because you don’t own a leased vehicle, you can’t depreciate it. However, you can deduct the business percentage of your lease payments. So if your yearly lease payment is $4,200 ($350/month) and your business use percentage is 80%, you may be able to deduct $3,360 on your tax return for that year.
There is one hitch: since the tax code limits the depreciation on “luxury” cars, it also limits (to a very small degree) lease payments on such a car. It’s called a “lease inclusion amount” and it reduces the deductible lease payments. The higher the original value of the car, the greater the amount.
As the price goes up on the car, leasing usually becomes more preferable. But don’t forget if you purchased the vehicle, you can also deduct the interest on the vehicle’s loan based on the percentage of business use.
If you purchased a car this year to transport passengers for self-employment jobs like Uber and Lyft and you bought a sports utility vehicle, you may be able to deduct up to $25,000 of the cost of the vehicle if you use it more than 50% for your business.
If you purchased a car for your business you may also be able to deduct up to the depreciation deduction allowed if your business use is more than 50%.
There is one more difference between buying and leasing a business vehicle, which is the disposition of the vehicle. When you dispose of a business vehicle that you own, there may be a taxable gain or deductible loss. The portion of any gain that is due to depreciation will be taxed as ordinary income. When you return your leased car to the dealer, there is no taxable gain or loss.
Don’t worry about knowing the tax laws related to business use of your car.
TurboTax Self-Employed will ask you simple questions about your business and give you the tax deductions you are eligible for.
If you still have questions, you can message us back in this Chat/thread - or you can schedule a TurboTax Live! call back or Chat session with one of our Live! Tax Experts - to answer any additional questions you may have!
We do wish you the best of luck in your vehicle selection - and we sincerely hope that the options and suggestions posted here - will assist you in making a great decision!! Cheers!
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