Should I Lease Or Should I Buy?

[Richard Tyler]

I'm self employed, and my business is incorporated in California. Which is better for me?

1) lease the car from Lexus

2) buy the car under my name, and write off the "expense" of the monthly payments to my business? The credit union giving me the loan will not allow me to buy the car under the business. They would only do it under my personal name.

What are the advantages and disadvantages for leasing? Thanks in advance.

[SW03ES]

Lease, no question. When you're self employed you can write as much as 100% of the lease payment off of your taxes which will make leasing MUCH more cost effective for you than buying in the long run.

Unless you plan on keeping the car a long time I'd lease it.

The main disadvantage to leasing is the mileage constraints and the added risk of building no equity in the vehicle. With a purchase you can always refinance the car and try and stay in it if your circumstances change etc, whereas with a Lease you dont have that option.

[monarch]

May depend on how many miles you drive a year and how long you plan to keep the car. Example: If you drove 30,000 business miles a year and if the Standard Mileage Deduction was $0.35 per mile then you'd have a deduction of $10,500 miles per year. At the end of 10 years you would have total deductions of $105,000

On the other hand, if you don't plan to drive much and don't plan on keeping the car very long then leasing could be a better bet.

[nc211]

this is right up my alley, as I am a business loan officer for a credit union. Your credit union probably won't do the business loan because it's not an approved business lending outfit from NCUA. Most credit unions aren't. Only a few in the country actually offer business loan services to thier members. Now...lease or purchase...Purchase grants you a deprecation deduction right off the bat. This is a non-cash expense...aka...when doing a cash flow analysis for your business, that depreciation is added back to your income. Leasing does not offer you that ability, since you don't own the car. Payments will be lower with a lease, but as the others indicate, it can really be a wash when considering your mileage penalty at the end. AND, not to mention, if there are any "dings, scratches, etc..." the cost to either repair them yourself, or have the dealer charge you for them at the end of the lease. The only way your business can claim ANY expense for the car if you get it in your name is if you lease it back to the business. However, that can cause some "glitches" sometimes due to the car being titled and registered with the DMV in your name, not the business. I personally won't do lease situations for my members. Only purchases. I'm not really sure if the mileage deduction calculations are correct, I think it's a percentage of the mileage that can be deducted. But I'm not a cpa, just a loan officer.

Here is my lease story. I leased a 2001 Maxima SE with 15k miles a year allocated for 3 years. My payment was $289, which fit my budget. During the summer of 2003 hurricane Irene hit us here in NC. A tree branch fell and hit the top back corner of my roof, right above the door. It put a nice sized baseball dent right on that corner. It was in the wrong spot, no dr. ding fixer could fix it because it was on the support beam for the roof line. They couldn't get behind it. When it came time to either sell it or turn it back in, that ding killed my resale. For me to fix it was $450+. For the dealer to hit me with the penalty was $875. I got lucky however, since the guy who came out to inspect the car, was a customer of mine and a friend. Since the dent did not break the paint, I just waxed it really well, parked it in the hot hot sun, and he missed it completely when he did his check out report.

If the credit union won't do the business loan, with you as a co-borrower, then go to a bank. I say purchase. Just my 2 cents worth.

[SW03ES]

Talk to a CPA first, nc's advice is good but I don't think that he fully understands the way the deduction works for a lease. He doesn't have to lease it back to the business to claim a deduction, you can get a deduction on your own if you work for a company and you privately lease a vehicle, and you certainly can as the owner of a business. Mine was leased in my name and I claim a deduction, and I dont lease it back to the company. My dad works as an employee and he's leased cars and gotten deductions for 20 years.

MY business isn't incorporated though, maybe that makes a difference.

Problem with leasing it or buying it in the company's name is usually thats automatically tier 2 credit vs where you may personally be tier 1.

[LexKid630]

I have only leased 1 car in my life; a 1998 LS400... But after 3 years i had to give it up because that was what i agreed with.....

Just remember that when you lease, you don't own it...It's like renting a house; you can't just start painting and cutting dwn walls to make it bigger etc.

It's the same with a car; if you make a dent, you can't just leave it and say, "Oh well, it still works." You have to fix it or you'll be paying a lot extra...

Just my suggestion....

[nc211]

SWO3ES, you are correct in regards to not being incorporated making a difference. If you're a Sole Proprietor, then your business taxes are done on your personal returns, under schedule C. The two "you and your business" blend together in the regards of assets and depreciation. If you're incorporated, and most likely a Sub "S" corporation, then your taxes are split from your personal 1040's and the company files on 1120S returns, completely different. Assets are not blended, which in turn gives the personal owner of the S corp more legal protection if his / her company is sued. The plaintif has a much much more difficult time going after any assets outside of the business. This being said, if your personal vehicle is showing up anywhere on the company balance sheet w/o a paper trial "i.e...lease payments from the company to you", then you're in violation and co-mingling assets. This is A GREAT way to get audited and fined from the IRS. Sole proprietor shops are "all and everything" blended into one, and the IRS, legal world and investors/lenders sees it that way.

Example: Sole Proprietor day care....kid slips, hurts himself. Parents are mad and decide to sue. Parents will be going after everything, including the primary home of the owner "unless you live in Texas or Florida, then home is protected." If day care center is Inc... then parents are suing just the Inc. and it's assets only. No link to personal assets, unless of course it can be proven the slip was no accident and done intentionally by individual "I threw little Johnny down the stairs".

[SW03ES]

I'm fully a sole proprietor thats probably the difference.

I still think theres a way to write the deduction off without leasing it back to the business though, but I'm not sure how.

[Econ]

To the best of my knowledge, what nc211 has said is entirely correct - I do accounting work on the side for a private practice CPA who handles primarly small business and personal returns. Generally speaking, the legal seperation between a Sub-S and it's sole owner creates the need for a paper trail that documents the transactions as wholly seperate. (Arms-length generally does not apply in this case, since it's privately held)

However, instead of leasing back to the company, why not have the Sub-S acquire the vehicle for business purposes and lease it itself?

You have to be careful, though, from a legal standpoint as courts won't hesitate to make the connection between a Sub-S and it's owner(s) in cases where the transactions were clearly not solely business decisions. Termed "piercing the veil", they will refuse to provide the personal protection afforded by incorporation in cases where the company was simply acting as a proxy (read: your !Removed!) for the owner(s). Ergo, if the company stops making payments, you may still be personally liable for the lease.

EDIT: Damnit, need to read the full post. Sorry. I wouldn't risk charging the payments back to your company without getting an opinion from a CPA in your area. There's no business reason for the payments to be charged back. And there's definitely no depreciation benefit, based on what I know, if you were to acquire the vehicle this way.

[branshew]

I'm fully a sole proprietor thats probably the difference.

←

That could be dangerous given the litigiousness of society these days. It's nothing for someone to sue you at the drop of a hat. I would never want any of my personal assets tied to my business in any way shape or form. There are enough other ways to get around that these days (S-Corp, LLC, etc) that I would think you could find a way to sever that liability and still take take the tax advantages of a sole proprietership. Of course that's just me being intrusive and not knowing anything about what you do so please take that with a grain of salt.

Back to the topic: the mileage allowance is now $0.415/mile for the IRS, but you can only deduct your business related mileage and not personal use mileage. You also have to keep detailed records of when and where you drive. Instead of the mileage method you could also use the expense method and deduct your actual expenses (gas, repairs, etc.) instead of mileage. Once you choose a method for the deduction you're stuck with it as long as you own the car.

I am also in favor of the outright purchase. While your lease payments may be lower, you're building up absolutely no equity (not that you ever get much w/ a depreciating asset). At the end of the term you'll own it and the resale value (assuming it's been maintained) should be greater than the difference between the lease and purchase payments.

[SW03ES]

There's no liability in what I do or I'd agree with you about the risk.

I am also in favor of the outright purchase. While your lease payments may be lower, you're building up absolutely no equity (not that you ever get much w/ a depreciating asset). At the end of the term you'll own it and the resale value (assuming it's been maintained) should be greater than the difference between the lease and purchase payments.

For some reason it never works out that way, the lease is always cheaper by a couple thousand dollars.

[nc211]

Example: My old 2001 Nissan Maxima. Purchase price $29,500 back in Aug. 01'. I put $5,000 down, leased for 36 months @ $290 month. Residual purchase price at end of lease term was $14,500. Total up the payments, add the $5,000 plus the residual price, and it actually cost $440 more.

[branshew]

For some reason it never works out that way, the lease is always cheaper by a couple thousand dollars.

←

That's always true for total payments over the term, but not always true if you look at the whole picture.

Here's an example for a Honda Civic 2005 Lease vs Buy option. Comparing Honda's promotional finance rate of 1.9% for 36 months vs. lease for 36 months. Cost of $0.15 per mile over 12K miles per year on the lease. Base price of $13,477.56. Taxes, maintenance, insurance, etc. excluded since they are paid on both lease and purchase.

Scenario A:

Lessee drives 20K miles per year

Total of all lease payments, inception costs, mileage excess fees when turned in $11,093.00.

Total of all finance payments over 36 months (assuming no down payment) for purchase option: $13,875.84

Now the prospective leasee would have saved $2,782.74 over the lease period, BUT at the end of the purchse option he is left with a car worth approx: $8,775.00 (Based on current NADA trade in value of a 2002 Civic DX w/ 60K miles)where at the end of his lease he has nothing. Basically he pays $2,800 more over the 36 months, but he gets a residual value of $8,800 when he owns the car outright. Subtract the residual value from the finance payments and you get a difference of $5075.84. Net cost to lease over 36 months is $11K and net cost to buy over 36 months is $5K.

Scenario B:

Lessee drives 12K miles per year.

Total of all lease payments, inception costs, mileage excess fees when turned in $7,493.00.

Total of all finance payments over 36 months (assuming no down payment) for purchase option: $13,875.84

If he kept the mileage within the 12K miles per yer limit he would have paid total lease payments of $7,493.00 which is significantly less than the $13K finance option. But the NADA trade in value on the same 2002 Civic DX w/ 36K miles is $9,275.00. Subtract that amount from the total finance payment and you get $4202.56. So the net lease cost him $7500 and the net buy cost him $4200.

The other thing that I don't like about leasing is that they always hit you with a condition adjustment fee and possibly mileage overage fee when you turn the car in. In the first scenario the leasee would pay out of pocket $3600 for the mileage overage at the end of the lease. I didn't factor in a condition adjustment. Now if you want to get into another car you have to come up w/ an additional $2K +/- on top of the $3600 for another lease inception fee or downpayment.

I realize I'm talking Honda and not Lexus here, but in either case in this example he comes out ahead in the end if he buys.

However, I didn't get into the different tax benefits of each so that would need to be factored in as well. Leasing is not always cheaper, but buying may not always be cheaper either if you factor in tax deductions. The moral of the story is that it always pays to do the math to determine which method is best for you.

[lsrxlex]

At the end of the lease term, for DIYers like us, I just don't know how can I provide proof/record of required maintenance? Do we have to do that to turn in the car anyway? I've never leased a car before and I'm ignorant about lease conditons. Low monthly expense makes the lease more affordable to me.

Thanks. :D

[SW03ES]

You really dont need to. I've turned several lease cars in with my dad and they've never asked for proof of maintenance.

bran- Bear in mind I'm only talking about luxury cars, some cars never make sense to lease because of their reslae value.

[branshew]

bran- Bear in mind I'm only talking about luxury cars, some cars never make sense to lease because of their resale value.

←

You're right. Most luxury cars take a big hit in the first 3-4 years. I was talking to one of my dealership customers the other day and he had a basic percentage formula for depreciation vs. age for luxury vehicles (wholesale). I think it was something like 40% after 3 years.

[lsrxlex]

So, for example, with a 2005 LS 430, leasing is better than buying it. If I understand correctly. :D

[SW03ES]

Exactly.

[branshew]

So, for example, with a 2005 LS 430, leasing is better than buying it. If I understand correctly. :D

←

Do the Math before you make your decision.

[SW03ES]

Definately

[Illinois]

The discussion thread on leasing vs buying was/is informative. I'm still a 'babe in the woods' however on trying to analyze whether to seriously consider leasing. I have always purchased. I am on the list for a 460 this fall, and my sales rep says leasing is the only way to go for me....??? A friend just leased a 750Li at a sweet deal, and he swears it is the only way to go. I cannot deduct any costs for business; I drive 12-15K per year; and my cars are immaculate at the end of two years. I have a 2004 LS 430 with 25K which I will either trade this fall or sell and lease............. Keep discussing, as I need to know more. Frankly, I don't know who to believe!!!

[SW03ES]

I agree with the sales rep, leasing sounds like a good bet for you to me as well.

I leased my ES and bought it out simply because of the desire to save that $500 payment while I was starting my most recent business. The next car will be leased though. I enjoy the "feeling" of owning the car but the tax savings for me cannot be ignored.

[branshew]

Illinois,

Keep in mind that the Lexus sales rep is only looking out for his bottom line and not yours so what he recommends is what's best for his wallet and maybe not yours. Normally I'm not a proponent of leasing as you have little to nothing to show for it in the end, but based on your info you may be better off with a lease assuming that.

1) You trade in your cars after a few years and

2) They are kept in immaculate condition and

3) You keep the mileage low.

Read the fine print in the lease though. Most low lease rates offered are based on 10K - 12K miles per year. Make sure you are covered for at least 15k miles/year in your lease. Your monthly payment may go up a little for the additional mileage charge, but it will be less overall then if you get hit w/ a $0.15/mile overage charge when you turn it in.

If payment is a concern, your monthly payment will be much lower with a lease. As it was said earlier inthe thread - do the math and factor in all the pros and cons of each and that should give you a good idea of what's best for you.