Car lease business vs. personal?

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tintingwu
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Car lease business vs. personal?

Post by tintingwu »

I am a regular salaried guy who loves cars, and loves leasing, knowing that leasing really isn't the best long term option from a financial perspective. I know a bunch of business owners, who lease fancy cars ALL the time, and I know they "write it off.

What does "writing it off" really mean in terms of the economics? Let's say a car leases for $1000/mo. - how much is someone saving if they have a business and justifies the car as a business expense vs. the average joe who's paying for that car out of salary? Is the business owner paying out of their salary, or does the monthly payment come out of the business revenue?

Sorry I know I could find this through youtube and other research, but really looking for some hands on feedback.
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vnatale
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Re: Car lease business vs. personal?

Post by vnatale »

tintingwu wrote: Sun Mar 31, 2024 3:59 pm I am a regular salaried guy who loves cars, and loves leasing, knowing that leasing really isn't the best long term option from a financial perspective. I know a bunch of business owners, who lease fancy cars ALL the time, and I know they "write it off.

What does "writing it off" really mean in terms of the economics? Let's say a car leases for $1000/mo. - how much is someone saving if they have a business and justifies the car as a business expense vs. the average joe who's paying for that car out of salary? Is the business owner paying out of their salary, or does the monthly payment come out of the business revenue?

Sorry I know I could find this through youtube and other research, but really looking for some hands on feedback.
The monthly payment does get paid by the business revenue. This is an expense that then reduced the business's net profit.

There are many ways the business can be organized - sole-proprietorship, LLC, partnership, C corporation, S Corporation. The net income eventually goes the owners' personal tax returns. Therefore by adding this expense and reducing net profits ... this results in less taxes being paid by the owners.
Above provided by: Vinny, who always says: "I only regret that I have but one lap to give to my cats." AND "I'm a more-is-more person."
billaster
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Re: Car lease business vs. personal?

Post by billaster »

In general you can't just "write it off". You can only deduct the percentage of car expenses that are attributed to actual business use. You must document and log miles used for business and used for personal and then pro-rate the expenses accordingly. In general, you can't deduct miles used to commute to your job unless you have a home office or your home is your main place of work.

So if you drive 10,000 miles a year and 5,000 of those miles are for business, then you can only deduct 50% of your vehicle expenses. Or else you can use the simplified method and take a 67 cents deduction each for 5,000 business miles.
NYCaviator
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Re: Car lease business vs. personal?

Post by NYCaviator »

billaster wrote: Sun Mar 31, 2024 8:29 pm In general you can't just "write it off". You can only deduct the percentage of car expenses that are attributed to actual business use. You must document and log miles used for business and used for personal and then pro-rate the expenses accordingly. In general, you can't deduct miles used to commute to your job unless you have a home office or your home is your main place of work.
This.

This requires quite a bit of record keeping to do it right. I know there are some people who lease very expensive cars and write the whole thing off, thinking it is all a business expense and they are being smart, but they will be in for a rude awakening if the IRS comes knocking.

I think there is even a rule that if your employer provides you with a vehicle, that portion which is used for personal use is taxable as a benefit to you.
eric321
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Re: Car lease business vs. personal?

Post by eric321 »

The big difference is taxes.

Let's say you have two people.
one salaried w-2 worker with a 50% marginal tax rate (federal/state/local) .
One business owner with also has the same marginal tax rate but is a consultant. Business owner consults on a project basis at a client job site.
W-2 employee can't deduct car costs to commute to work.
1099 business owner's trip to a client job site is a business expense.
let's say the 1099 business owner makes 500k a year. Expensive vehicle costs 1k/month to lease plus 1k/month business auto insurance, gas, maintenance, car washes etc.
The w-2 employee would pay for all those expenses with post tax money.
The 1099 business owner would pay for that with pre-tax money. So 500k-24k minus any other business expenses results in the business income that then gets taxes.

The business owner reduces their taxable income and essentially pays (1- marginal tax rate) x cost of the lease.

The there is the section 179 deductions. Let's say the business needs a luxury suv that has a gross vehicle rating above a certain threshold. The business can choose to expense the entire vehicle in one year and reduce the tax liability by the cost of the vehicle. The business owner can finance the vehicle and still depreciate the entire cost of the. Vehicle. So if the vehicle costs $75k, their business profit would be $500k in revenue minus $75k vehicle minus $12k operating costs minus anything else, and becomes $413k of taxable. Income.
billaster
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Re: Car lease business vs. personal?

Post by billaster »

It's important to keep in mind that it isn't a free car. If the car expenses are $25K, it costs both the business owner and the non-business owner $25K. The difference is that the business owner pays with pre-tax money and the non-business owner pays with after-tax money.

But also important, the business owner can only deduct the pro rata portion that is actually business mileage and not personal mileage. If they use the car for personal use, they can't deduct the full expense of the car.
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vnatale
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Re: Car lease business vs. personal?

Post by vnatale »

NYCaviator wrote: Sun Mar 31, 2024 8:43 pm
billaster wrote: Sun Mar 31, 2024 8:29 pm In general you can't just "write it off". You can only deduct the percentage of car expenses that are attributed to actual business use. You must document and log miles used for business and used for personal and then pro-rate the expenses accordingly. In general, you can't deduct miles used to commute to your job unless you have a home office or your home is your main place of work.
This.

This requires quite a bit of record keeping to do it right. I know there are some people who lease very expensive cars and write the whole thing off, thinking it is all a business expense and they are being smart, but they will be in for a rude awakening if the IRS comes knocking.

I think there is even a rule that if your employer provides you with a vehicle, that portion which is used for personal use is taxable as a benefit to you.
Are you (or anyone else reading this) aware of the IRS ever making this challenge?

Here is an article of the correct way of handling it:

https://tax.thomsonreuters.com/blog/you ... mpany-car/

Your guide to year-end 2023: Personal use of a company car
Ingrid Chawla Tax and Accounting Editor

November 27, 2023 · 5 minute read
Above provided by: Vinny, who always says: "I only regret that I have but one lap to give to my cats." AND "I'm a more-is-more person."
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vnatale
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Re: Car lease business vs. personal?

Post by vnatale »

billaster wrote: Mon Apr 01, 2024 8:19 pm It's important to keep in mind that it isn't a free car. If the car expenses are $25K, it costs both the business owner and the non-business owner $25K. The difference is that the business owner pays with pre-tax money and the non-business owner pays with after-tax money.

But also important, the business owner can only deduct the pro rata portion that is actually business mileage and not personal mileage. If they use the car for personal use, they can't deduct the full expense of the car.
They can't according to the IRS rules.

In reality they cannot deduct whatever portion they declare as being for personal use.
Above provided by: Vinny, who always says: "I only regret that I have but one lap to give to my cats." AND "I'm a more-is-more person."
billaster
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Re: Car lease business vs. personal?

Post by billaster »

vnatale wrote: Mon Apr 01, 2024 9:44 pm Here is an article of the correct way of handling it:

https://tax.thomsonreuters.com/blog/you ... mpany-car/

Your guide to year-end 2023: Personal use of a company car
Ingrid Chawla Tax and Accounting Editor

November 27, 2023 · 5 minute read
That article is talking about something completely different. It is about a W-2 employee of a company who receives a car for personal use as a fringe benefit. Fringe benefits are fully taxable to the employee, for both income and FICA. It's the same as if the employer gave you an allowance so you could buy a car. That's simply part of your salary and is taxable. It is reported as part of your salary on your W-2.

The original question was about a vehicle that a business owner uses at least part of the time for business purposes. Only the business portion is deductible, not the personal use portion. The owner must keep careful logs for to document business mileage.
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snackdog
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Re: Car lease business vs. personal?

Post by snackdog »

Your question doesn't appear to be actionable since you don't have a business. You are just curious?

The savings is simply the business cost of the vehicle (lease + operating costs) multiplied by the marginal tax rate the business pays.

If the lease is $1000/mo and gas, insurance and maintenance averages $500/mo then total is $1500/mo. If the business is paying 20% income tax, they will save $300/mo on the car expense vs what it would cost you as an individdle.
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tintingwu
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Re: Car lease business vs. personal?

Post by tintingwu »

snackdog wrote: Tue Apr 02, 2024 9:18 am Your question doesn't appear to be actionable since you don't have a business. You are just curious?

The savings is simply the business cost of the vehicle (lease + operating costs) multiplied by the marginal tax rate the business pays.

If the lease is $1000/mo and gas, insurance and maintenance averages $500/mo then total is $1500/mo. If the business is paying 20% income tax, they will save $300/mo on the car expense vs what it would cost you as an individdle.
Yeah this is exactly what I was wondering. Mainly curious as so many of my friends keep leasing 70-100K worth cars and their business isn't even doing that well, so i wonder how they are justifying it!
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Re: Car lease business vs. personal?

Post by sailaway »

tintingwu wrote: Tue Apr 02, 2024 10:51 am
snackdog wrote: Tue Apr 02, 2024 9:18 am Your question doesn't appear to be actionable since you don't have a business. You are just curious?

The savings is simply the business cost of the vehicle (lease + operating costs) multiplied by the marginal tax rate the business pays.

If the lease is $1000/mo and gas, insurance and maintenance averages $500/mo then total is $1500/mo. If the business is paying 20% income tax, they will save $300/mo on the car expense vs what it would cost you as an individdle.
Yeah this is exactly what I was wondering. Mainly curious as so many of my friends keep leasing 70-100K worth cars and their business isn't even doing that well, so i wonder how they are justifying it!
People can justify anything. We have a friend who constantly moans about finances, including ways in which they negatively affect personal relationships, and leases a new BMW. Just signed the newest lease a couple of months ago.
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