Lessees: drive hard for every tax break

Black Enterprise, Dec, 1996 by Donald Jay Korn

As the price of a new car climbs into the stratosphere, leasing becomes increasingly more attractive. When you buy a $50,000 car, you might have to pay over $700 per month (including insurance) for four years - and wind up owning a four-year-old car. On the other hand, you can lease that same car for less than $500 per month and roll over the lease to another new model at the end of four years.

But what makes leasing even more attractive - and affordable - is that you can deduct the business use portion of the lease payments. For example, let's say that three-quarters of the time, you drive the car for business. Then three-quarters of the lease payments will be deductible. Furthermore, you can deduct the percentage of business use associated with operating the car, including your outlays for gas, repairs, insurance and the like. "It's important that you keep a careful log showing business versus personal use to support your deductions," says Glenn F. Mackles, principal in the Washington, D.C., office of the accounting firm of Deloitte & Touche.

For example, you might be able to deduct $300 out of a $400 monthly payment. If you make an up-front payment to reduce the monthly charge, then for tax purposes that payment must be spread over the life of the lease.

Offhand, leasing may beat buying when it comes to tax benefits. Under current law, the interest you pay on a car loan is usually not deductible. However, when you lease, finance charges are included in the monthly payment. But if you get to deduct three-quarters of your lease payment, you're actually deducting three-quarters of the interest as well.

If you lease a so-called luxury car (any vehicle leased in 1996 that's worth more than $15,500), you have to give up part of your tax deduction based on the value of the car and the percentage of business use. The calculation is explained in IRS Publication #917, Business Use of a Car, available free by calling 800-TAX-FORM (800-829-3676).

As is generally the case, deducting car leasing expenses is easier if you're self-employed: they go right on Schedule C of your tax return with all your other business expenses. If you're an employee, car leasing expenses are included as a "miscellaneous itemized deduction" on Schedule A. All your miscellaneous deductions (such as job-hunting costs and expenses related to your investments) are added up and the amount that exceeds 2% of your adjusted gross income is deductible.

Things get a little tricky if your employer (or a company you own) leases a car for you as a fringe benefit. "The standard procedure," says Mackles, "is for the company to deduct the cost of the monthly lease payment while the employee has to pay tax on imputed income from personal use." If the company is paying, and deducting, $400 per month to lease a car for you, and your personal use is 25%, you'd have an extra $100 per month in taxable income.

Unfortunately, commuting to and from work is considered a personal rather than business use of your car.

A word to the wise: Whether you have just joined the ranks of the self-employed or are doing a little business on the side, don't underestimate the impact of taxes when it comes to planning ahead. Keep in mind that as your personal, or business, income rises, your tax bill will likely increase. Don't go it alone; consult a tax professional.