Should I Buy or Lease My Next Vehicle for Tax Purposes?

Should I Buy or Lease My Next Vehicle for Tax Purposes?

When deciding whether to buy or lease a vehicle for tax purposes, it’s important to weigh the tax benefits against the financial realities—and also consider how this fits your personal needs beyond business use.

Leasing generally offers lower monthly payments, and if the vehicle is used for business, you can deduct the lease payments based on the percentage of business use. Leasing is a good choice if you want a new car every few years and prefer not to worry about long-term maintenance or resale value. However, you’ll face mileage limits, fees for wear and tear, and you won’t own the car at the end of the lease.

Buying offers different benefits. You can deduct depreciation, interest on a car loan, and certain business-related operating expenses. Plus, in some cases, you may be able to fully expense the vehicle in the first year if it qualifies for Section 179 or bonus depreciation, or at least a large portion of it. This can provide a significant upfront tax break. However, be aware of depreciation recapture—if you sell the car for more than its depreciated value, you’ll owe taxes on that gain, which reduces some of the tax advantages.

Example:

• Leasing a car for $500/month provides a $6,000 deduction if used entirely for business.

• Buying a $30,000 car may allow you to fully expense it in the first year or depreciate it over several years. But when you sell, you may face taxes due to depreciation recapture.

Looking Beyond Taxes:

From a personal perspective, think about how long you plan to keep the car and how much you drive. Leasing is ideal if you like driving a new car every few years and don’t drive excessive miles. Buying may save more in the long run, especially if you plan to keep the car for many years and avoid mileage limits.

Summary:

• Lease if you want lower payments and frequent upgrades without the burden of ownership.

• Buy if you prefer ownership and potential large tax write-offs, but be prepared for depreciation recapture when you sell.

Always consider both tax implications and your personal situation. Consulting with your accountant can help you choose the best option for your specific needs.