Last updated on May 16, 2017 at 02:40 pm
In an earlier article for “Should I Buy or Lease My Car” I spoke about the pros and cons of leasing vs. buying, based on business decisions and personal preference. In this article I will explain three tax issues that you might want to consider when making the decision about your next car purchase:
- If you own a business, you can take the full tax deduction for your monthly lease payments. Although this does not allow for strong long-term cash flow, if you like to drive a new car regularly and you do not exceed 12,000-15,000 miles annually, this incentive can complement your comfort level with leasing. For business purposes, leasing is an advantage over buying a car, which entails writing off the annual depreciation at year end.
- One drawback when leasing is determining your monthly payment, which can be confusing. This is because payments are based on the value of the car at the end of the lease. The residual value of the car when the lease is over is the number (referred to as ‘cost of usage’) that is necessary to calculate your payments. Remember though, that lease payments might be negotiable. It is worth a discussion before you sign the contract! Also, keep in mind that foreign cars typically maintain their value better than American-made cars, which can result in lower monthly payments based on the expectation of a higher residual value at lease end. The “mystery” that surrounds lease payments does not exist when you are purchasing a car–so the process is less complicated.
- Interest rates can also be more baffling when leasing rather than buying. When you buy a car, the bank or financing company provides you with a fixed interest rate which represents the cost of borrowing. While you can–and should–negotiate for an attractive interest rate, once established, there is clarity regarding the amount. When leasing though, there continues to be more ambiguity surrounding the calculations. The interest rate is determined by dividing the interest factor by 2400. There is also much less flexibility in setting the interest rate for a leased vehicle than when setting the rate for one that is purchased.
So remember, when considering which option is best for you, keep these points in mind:
- Base your decision in part on your personal comfort level with the attributes of either alternative – leasing or buying;
- Negotiate as much as possible–never assume the number you are given, either for the interest rate or the monthly lease payment, is final;
- Be thoughtful when exploring the grey areas, such as interest rate calculations, and do not be afraid to ask for clarity.
Still not sure which is right for you? Leave a comment below or tweet us @plymouthrock.
Ken Bagner is a member of Sobel & Co. LLC. He is a member of the American Institute of Certified Public Accountants and the New Jersey Society of Certified Public Accountants. Plymouth Rock is proud to partner with NJSCPA to bring you valuable tips for about your financial health. Qualified members of the NJSCPA can receive a discount on their car insurance through Plymouth Rock Assurance New Jersey.