LEASING INSTEAD OF SELLING YOUR VEHICLE TO THE COMPANY
To conserve cash/capital, consider leasing autos instead of buying them. There may be a tax advantage to leasing vehicles as well. Lease payments are deductible as current business expense, like electricity or office supplies.
Here are some tax slants that apply to any form of enterprise, from S Corporation to a LLC:
-Tax Rules Favor Leasing
The tax advantage of leasing starts when your business usage is 50% or more and the vehicle costs to own and operate exceed $15,000. Part of the reason is that if you lease, your lease payments are deductible in full, if the vehicle is used 100% for business. On the other hand, if you buy instead of lease, your tax write-off period for depreciation extends beyond five years for most vehicles. For instance, it might take 20 years to fully write off a $75,000 Mercedes if you buy it. As you know few people will own a car for that length of time. Leasing gets you around the depreciation deduction limits for most new vehicles. Thus, Auto lease payments are deductible business expense without the tax limitation placed on purchased vehicles. So it is obvious the tax code favors leasing over buying more expensive passenger vehicles.
Here is how the vehicle lease operates:
The business owner/owners lease their vehicle their business. The owners business pays a monthly fee, determined by the lease, to the owner for the use of the vehicle in the ordinary course of business. From there owner’s business will pick up all the automobile expenses from that point on. The monthly lease fee in conjunction with the actual automobile expenses paid by the business is a tax deduction for the corporation (see below for more information). Although the lease fee received from the business is personal income that has to be reported, it is deemed passive income and is an excellent way to receive money from your business. This is because you do not have to pay social security, FICA and Medicare on these earnings. Moreover, this passive income to the owner is offset by the actual operating expenses your business sustains with the use of the vehicle (See below for more details on tax deductible expenditures.)
-You are able to write off interest incurred in lease, not so if the business owns the vehicle. Note: If you are an employee, you cannot deduct any interest paid on a car loan. This interest is treated as personal interest and is not deductible. However, if you are self-employed and use your car in that business you are able to.
-Leasing also avoids the tax issues of disposing of an owned car or truck. That is because truing a leased car back over to yourself is a non-taxable event. By comparison trading in an owned car will likely increase your basis in the new car you purchase, meaning it will be a long time before you are able to write off all depreciation deductions. Additionally, selling the owned car means a tax loss or gain.
-Actual car expense is the real key for larger write-offs with the vehicle lease. You may write off: gasoline, depreciation of the vehicle, garage rent, and insurance fees. Lease payments, licenses, oil, parking fees registration fees, repairs, tires, tolls.
-Personal property taxes may be deducted if you are an employee.