Dear Editor: A friend recently told me that great car lease deals are available at www.LeaseTrader.com, which facilitates transfer of leased autos and trucks to new owners/lessees. My friend also said that auto lease expenses are 100% deductible as a business expense if the lease is taken out by the business itself. Is this true?
Editor’s Reply: As with any marketplace, there’s opportunity for both good and bad deals. During an economic downturn, more people want to get out of financial obligations such as leases. You may be able to find a way to turn this to your benefit, but, as always, it’s buyer beware. There will be winners and losers on both sides. Also, I’m not a big fan of leasing, for three reasons:
1. No Equity Buildup. When you purchase a car and make payments, you’ll eventually build equity (i.e., owe less than it is worth). Sure, you may get “under water” in the early years, but in the later years you’ll have something of value – an asset that’s paid for and can be put to productive use. Not so with a lease – in most cases.
2. Expensive: Most auto leases are for new vehicles. Terms of two, three and four years. These are the most expensive years of a vehicle’s life due to rapid value erosion (depreciation). This expense is factored into the lease rate. Incidentally, this is true whether you originated the lease or assumed it.
3. Low-Cost Option Not Available: Automobile leases are primarily for new cars and are, as such, a luxury. Ditto for buying a new car. But if you buy rather than lease, you’ll have the additional option – if your financial circumstances turn downward – of driving the vehicle deeper into its useful life, possibly even after it’s fully paid for. This is a worst-case scenario option not available to those who lease. Given how quickly fortunes can change, having options can sometimes mean the difference between financial survival and failure.
Of course, some people lease because they don’t have, or don’t want to part with, the down payment required to purchase a nice new car. True, that’s a benefit to leasing, but you’re going to fully pay for the cost of driving a new car whether you lease or buy. The more financially conservative thing to do – especially if you don’t have the money available to make a down payment – is to buy a late-model used car.
Good deals to be had? From the comments made by my friend, the enticing part of the lease assumption idea seemed to be that the original lessee will have paid the tax and title and, in some cases, a little “money down.” If the lease is transferred to another, the succeeding person or entity will get the automobile and have completely avoided all up-front monies! This is true, but before you conclude that a free lunch is available here, consider that the value curve looks like this for any new vehicle:
Consider as well that the lease payment amount is the same every month even while the value of the underlying vehicle declines rapidly over the lease term. Shouldn’t the payments be a lot larger in the earlier years? Lower late in the lease term? Well, of course, they’re not. They’re constant. If you assume a vehicle lease, you may avoid certain payments that had to be made at origination, but you also pay the same monthly rate as the person who got to drive the vehicle during the most valuable period of the vehicle’s life. Free lunch? Doesn’t sound like it to me.
Deductibility of Vehicle Leases: Auto lease payments, as well as all other auto-related expenses such as fuel and insurance, are deductible to the extent the vehicle is used for business purposes. If you use the vehicle for personal use, the person who drives the vehicle will be taxed personally on the value of the personal use. In addition, the IRS caps the dollar amount of lease payments that can be deducted, in effect disallowing deduction of lease payments for “luxury vehicles.” So, as is often the case, there is no free lunch here with respect to leasing a vehicle through a business.
Jeffrey Burns, CPA, provided his expertise for the tax-related parts of this article.
This article originally appeared in The Business Owner Journal, the periodical of choice for owners of small and midsize private businesses. All rights reserved, D.L. Perkins LLC. © 2012.
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