Nicholas P. DiNatale, CPA -
Certified Public Accounting & Business Advisory

Business Resources - FAQ

Should I lease or buy the company car?

This question usually tailgates the decision to acquire a company vehicle. While there is no single right answer for all situations, knowing the tax attributes of each option will assist you with making an informed decision. The IRS has specific rules to govern the deductibility of corporate "luxury vehicles." Per the IRS, a luxury vehicle is any with an adjusted basis (generally the cost) greater than $15,800. This puts a Jeep Wrangler in the same class as a Jaguar XK8! The issue here is not the definition of a luxury vehicle, but the tax treatment. If your corporation purchased a luxury vehicle, your annual deduction is comprised of the interest on the loan payments, plus depreciation, which is limited to $3,060 for year 1 ($5,000 year 2; $2,950 year 3; and $1,775 thereafter). It will take over 16 years to fully depreciate a $35,000 vehicle with this method. These deductions are further limited by the percentage of personal use.

The opposing argument is simple: compare the limitations related to ownership to a current deduction for the entire amount of the lease payments. The IRS has noticed the benefit of leasing and has made a provision to even the playing field. This amounts to a "lease inclusion," an amount to be included as income meant to quantify the tax depreciation limitations. Even with this amount, which is only a fraction of the annual lease requirement, there is no contest. For most businesses, leasing is the practical decision.

There is an exclusion available which gives small businesses the opportunity to avoid the luxury vehicle burdens. The exclusion applies to vehicles weighing in excess of 6,000 pounds, and allows these automobiles to avoid the luxury car tax depreciation limitations. Here’s a shopping tip: while many standard sport utilities will not qualify, many will pass the 6,000 pound limit if equipped with the heavy towing package. Weight class information can be found on the sticker on the driver’s side doorsill. Although the heavy vehicle will not be subject to the luxury auto limits, the lease inclusion amount will still apply.

In all cases, the driver of a corporate vehicle will have to include in income an amount which represents the value of the personal use of the vehicle. Personal use includes commuting between an employee’s home and principal place of business and other non-business mileage. All drivers must keep a mileage log! I cannot stress enough how important this is as the IRS will DISALLOW vehicle deductions not supported with a contemporaneous mileage log. Such personal use inclusions are based on annual valuation tables published by the IRS and are subject to social security and income taxes.

Expenses related to corporate vehicles such as gasoline, insurance, maintenance, tires, car washes, etc. are current expenses of the organization.

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