YOUR CAR AND YOUR MONEY
It's Tax Time ... Buy or Lease?
By Gerald Levinson CMA
Buying or leasing an auto for business purposes should be a
straight forward uncomplicated tax transaction, but it's not.
Today's company auto creates more Federal Income Tax
complications and paperwork than almost any other type of
business asset.
Revised tax codes have eliminated the 5 year depreciation tax
write-off and replaced it with a 12 year write off with
artificially set caps depending on the value of the car.
For 1995 the limits are as follows: 1st tax year $3,060; 2nd tax
year $4,900; 3rd tax year $2,950; and $1,775 for each succeeding
year until full recovery is made. Be aware that these limits are
further lowered because personal use percentages have to be taken
into consideration.
Although the current trend is towards leasing which offers a
better write-off with less paper processing -- buying under
certain circumstances is still financially attractive. That's why
it's imperative to formulate an overall strategy which optimizes
cash flow while yielding the maximum in tax savings.
And wether you end up buying or leasing, one thing is clear,
there are firm fast Federal Income Tax rules relative to the
personal use of the auto which must be addressed including
payroll and fringe benefit issues.
For instance as a self employed person (IRS TAX FORM 1040
SCHEDULE C) you can deduct auto expenses in three ways. If the
car is purchased you can deduct depreciation equal to the
percentage of business use, plus operating expenses such as gas,
repairs, insurance and so on. (Remember this is over a twelve
year period with a upper limit set by the IRS.)
In lieu of the above you may claim mileage at 30 cents per mile
you used the car for business purposes. You cant use both. And
once adopted you must use it on a consistent basis each year.
However if the car is leased, only the full lease payment
adjusted for actual business use can be deducted plus operating
expenses.
The regulations are the same for corporate owners (IRS TAX FORM
1120) and their employees as long as the value of the personal
use of the car is treated as fringe benefit compensation income.
In a corporate environment the 30 cent mileage alternative is not
an option.
And thats not all, if your company leases a "luxury" company
auto, it will wind up with a special add-back to income (called
the lease inclusion amount) that varies with the value of the car
and the year of the lease.
Finally, the IRS is saying that for Federal Income Tax purposes
the personal use of the car is income to you as well as your
employees. That's because the value of the employee's personal
mileage must be treated as non-cash fringe benefit income, and
further it must be reported by your company on a W2 or 1099.
If this is too much to comprehend, join the club and consult your
tax advisor.
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