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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 4004
Experience:  Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
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Im a partner in a couple small businesses. I have 5% ownership

Resolved Question:

I'm a partner in a couple small businesses. I have 5% ownership in one, 49% in the other. I am looking to lease a vehicle primarily for business use. I know that the percentage of the payments that is business use can be deductible, but how much of the down payment can I deduct off of this years taxes? Also, does my ownership percentages affect how much I can deduct?
Submitted: 1 year ago.
Category: Tax
Expert:  Lane replied 1 year ago.

NPVAdvisor : Leased Vehicles Require Special Computations

Leasing a vehicle requires special computations. In addition, unless you use the standard mileage rate (SMR) in your first year, then you will not be able to use this method during the term of the lease.


Electing the SMR. If you lease a vehicle for your business, you can elect to use the standard mileage rate, if you do so in the very first year of the lease--and you will need to continue to use this method throughout the entire term of the lease.


If you use the standard mileage rate you are not able to claim a separate deduction for you lease payments. The beauty of the standard mileage rate is nearly all the expenses of operating a car are figured into the rate. However, the simplicity may result in leaving money on the table--or, more accurately, handing it over to Uncle Sam in taxes owed.


Using the actual cost method. If you want to make sure that you get the maximum deduction and are willing to keep meticulous records of every vehicle-related expense, you can opt to use the actual cost method for computing your vehicle expenses. If you use the actual cost method, you can deduct each lease payment as a rental expense.


You Must Allocate Expenses If There Is Personal Use When the business use of a leased vehicle is less than 100 percent, the rental deduction is scaled down in proportion to the personal use.

NPVAdvisor :

As an aside:

NPVAdvisor :

If you use a leased car 75 percent for business, and 25 percent for personal purposes and commuting, you can deduct only 75 percent of the lease payments. The percentage of use for business is determined using your mileage records.

NPVAdvisor :

hang with me here

NPVAdvisor :

Inclusion Amount Reduces Lease Payment


To prevent people from leasing a car to avoid the luxury car depreciation limits that apply to many purchased vehicles, the law requires that you must reduce your deductible lease payments by an amount referred to as the "inclusion amount.


If the fair market value of the car was more than the triggering threshold (see charts, below), you must reduce your deductible lease expenses by the applicable inclusion amount for each year that you lease the vehicle.


To determine the inclusion amount you need three pieces of information:



  1. the fair market value of the vehicle on the day you entered into the lease agreement. This is be the amount you use for the entire lease term, even though the FMV of a vehicle drops with each passing year;

  2. the percentage of business use of the vehicle during the year; and

  3. the number of days in the lease term in your tax year (January through December for virtually all sole proprietors). This will will be less than a full year in the first and last year of the lease






























Cars
FMV Triggering Inclusion Amount
Year Lease BeganFair Market Value
2008–2012$18,500
2007$15,500
2005–2006$15,200
2004$17,500
2003$18,000
1999–2002$15,500

NPVAdvisor :

These tables are published in IRS Publication 463, Travel, Entertainment, Gifts, and Car Expenses.There is separate table for leased cars and for leased trucks and vans, so it's important to consult the correct table in doing the calculation.


To use the table, find the value of your car on the first day of your lease term (or on the day you converted your personal car to business use) in the first column, and read across the line to the column that matches the year of your lease to find the dollar value to be included. Then prorate the dollar amount from the table for the number of days of the lease term included in your tax year, and multiply the prorated amount by your percentage of business use for the year (as calculated by using your mileage records).

NPVAdvisor :

So, it's not quite as simple as what part is deductible

NPVAdvisor :

Remember ,


The standard mileage rate can also be used for a leased vehicle. If you use the standard mileage rate, you cannot switch to the actual expense method in a later year.


If you use the standard mileage rate for a leased vehicle, the lease payment amount is not deductible.


Leased vehicles are not depreciated. Instead, the business portion of the lease payment is deducted. When the value of the leased vehicle is above a certain amount, you must also subtract an "income inclusion" amount from the deductible amount. For vehicles first leased in 2012, the threshold is $18,500. This income inclusion rule is an attempt to equalize the tax benefits from leasing and owning business vehicles.


For example, a vehicle leased in 2012 that is valued at $45,500 and that is used 100% for business would require an income inclusion amount of $17 to be subtracted from the 2012 lease payments in arriving at the deductible amount for that year. In 2013, the income inclusion amount would be $37. Higher income inclusion amounts would apply for 2014 through 2016.

NPVAdvisor :

sometimes the standard mileage rate is much cleaner .... (certainly less administrative overhead)

Customer: So my ownership percentages don't affect the amount of deduction I can take at all, it's just the percentage of business use that will affect it?
NPVAdvisor :

right

NPVAdvisor :

with either method

NPVAdvisor :

because whether you're using actual cost (which is a real headache when leasing) or mileage, you're essentially using up the car with it's business use

Customer: I've read that the down payment is spread over the life of the lease, so a $5000 down payment is spread over the three years for tax deduction purposes? Am I understanding that correctly?
NPVAdvisor :

the mileage, probably stating the obvious here, has an assumed depreciation built in

NPVAdvisor :

yes, that's correct

NPVAdvisor :

you see that above

NPVAdvisor :

too

Customer: Ok, I think I've got it now. Thank you!
NPVAdvisor :

... welcome (the link,s etc above will stay active, to come back for reference

Customer: Awesome, thanks again
NPVAdvisor :

If this HAS helped, I would appreciate a feedback rating of 3 (OK) or better … That's the only way they will pay us here.


HOWEVER, if you need more on this, PLEASE COME BACK here, so you won't be charged for another question.


 

NPVAdvisor :

you're welcome

NPVAdvisor :

If you'd like to work with me, specifically, again ... just say "for Lane only," at the beginning of your questions

NPVAdvisor :

Thansk for using us

NPVAdvisor :

Lane

Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 4004
Experience: Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
Lane and 6 other Tax Specialists are ready to help you
Expert:  Lane replied 1 year ago.
Our chat has ended, but you can still continue to ask me questions here until you are satisfied with your answer. Come back to this page to view our conversation and any other new information.

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Expert:  Lane replied 1 year ago.

Thanks much!

As a follow-up ...

Here’s an example showing the differences in business deductions between purchase versus leasing a car with the value of $35,000 and 80% business use.

Purchased $35,000 car

1st year

2nd year

3rd year

Limited Depreciation

$3,060

$4,900

$2,850

Less 20% personal use

$612

$980

$570

Allowed business deduction

$2,448

$3,920

$2,280









Leased $35,000 car

1st year

2nd year

3rd year

Yearly payments

$4,500

$4,500

$4,500

Less inclusion

$138

$303

$452

Net monthly payments

$4,362

$4,197

$4,048

Less 20% personal use

$872

$839

$810

Allowed business deduction

$3,490

$3,358

$3,238


You can see that you need to look at the combined years to see if it’s better to purchase or lease a business vehicle. As the price goes up on the car, leasing usually becomes more preferable. But don’t forget if you purchased the vehicle, you can also deduct the business percentage of the interest on the vehicle’s loan.

There is one more difference between buying and leasing a business vehicle. That difference is the disposition of the vehicle. When you dispose of a business vehicle that you own, there may be taxable gain or deductible loss. The portion of any gain that is due to depreciation will be taxed as ordinary income. When you return your leased car to the dealer, there is no taxable gain or loss.

From:
http://blog.turbotax.intuit.com/2007/08/02/buy-or-lease-your-new-business-vehicle/

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