Here are some important points to consider in evaluating lease vs. buy tax.
Lease Tax Treatment vs. Depreciation
Depreciation is a tax method that allows you to deduct the cost of your vehicle over the course of its useful lifespan. Thanks to Tax Reform, depreciation rules now allow you to deduct a larger portion of your vehicle purchase during the first year than in subsequent years of owning the vehicle.
There are annual depreciation limits that you must follow. A table of the updated 2018 depreciation limits for passenger vehicles is available here.
On the other hand, vehicle leasing payments are only deductible based on the percentage of use of the vehicle for business. When it comes to leasing versus buying, purchasing a vehicle allows you to deduct much more on your taxes than leasing does.
For example, if you consider leasing a car for $350/mo versus purchasing a used one for $20,000 with financing, you would have to choose from the following options on your taxes:
- Leasing a vehicle means that your annual deductible for depreciation will only be $4,200 ($350 * 12 months).
- Purchasing a vehicle means that the first tax year annual depreciation limit of $10,000 would apply.
As a result, purchasing a vehicle will give you the opportunity to deduct at the maximum $5,800 more from your taxes than leasing.
Selling Your Used Vehicle vs. a Lease
If you decide to sell your vehicle, you can sell it for however much you want to sell it for. However, you will still need to use the depreciated price when it comes to deducting your realized gains on your taxes.
Depreciation begins when a vehicle is put into service and ends when the vehicle is removed from service (because you sold it or some other reason) or the cost has been recovered. The new depreciation rules could save you a lot of money if you purchase a used vehicle with finance because you can also decide to use it as a trade-in or sell it to an employee.
On the other hand when you have a lease, you have no equity in the vehicle. That means you won’t be able to take advantage of depreciation rules because you don’t have anything to deduct.
Buying Is Now a Better Option Than Leasing
In 2017, the depreciation limit on a used car was $3,600. As a result, leasing was almost always a more attractive option for more expensive cars. However, taking all of these recent developments into account, Tax Reform has now made buying, even used vehicles, more attractive than leasing.
With a $10,000 first year depreciation limit now in effect, you should strongly consider purchasing any new vehicles for your rideshare business in order to take advantage of this new higher limit. But first you might also want to factor in the whether you have the cash for a down payment on an auto loan, how many miles you expect to drive each year, and the cost of maintenance.
If you are unsure as to which option would work best when taking these other factors into account, make sure that you discuss your plans with a qualified tax professional. This will ensure that you fully understand the tax implications of your next vehicle purchase or lease.