Lease or buy, should be an easy decision for a business owner, right?
Real Life Event: Ditching the 2002 Honda Accord and ponying up for a 3-Class BMW with all the bells and whistles.
Tax Issue: Does it make more sense for a business owner like myself to lease the BMW or buy?
Tax Code: Section 162 (a) – Probably the most cited section of the Internal Revenue Code – This section states that taxpayers are allowed a taxable deduction for all necessary expenses paid in carrying on a trade or business. As an extension of the code, IRS Publication 463 states that the business portion of a lease payment is fully deductible in carrying on a trade or business.
It has been a year since I purchased this car and I do not regret the decision I made. I love how the car drives, and I’m glad I made the uncommon decision of a business owner to purchase, rather than lease. Many people in my lease vs buy decision hear everyone give their 2 cents about how they should lease the car because, “you can deduct everything.” That is not true, only the amount of your payment (if you choose to deduct actual expenses instead of standard mileage rate) allocated to driving for your personal business can be deducted. For my tax preparation business I don’t drive too much to see clients, usually my clientele prefers to transfer and sign files digitally. So it really did not make sense for me to lease instead of purchase.
To play the Devil’s Advocate, what if I drove as much as my lawyer clients? If I drove as much as them, I would have had more reason to lease. But, ultimately, I think I would have made the same purchase decision. That is because I really like the car, and I knew that I would want it after the lease period expires. I would have had the choice to purchase after the lease term, but that would end up being more expensive than purchasing it outright. Once again, the adage applies, if you plan on using it for a long time, then you should purchase it. I purchased all the technology options for the car, so I knew it would still have that modern feel after 5+ years of owning. Many of the options are so seamless that I didn’t realize they are a necessity until I drive an older car.
Now this isn’t by any means a review of my BMW, but it’s just a reminder that you shouldn’t base your decisions based on the tax impact. Instead, you should look at all the variables related to your decision. And factoring the imposition of tax, does your decision make the best sense? Is it a decision that you can live with not only in the short-term, but years down the road? Many people have their ideas on a lease vs buy proposition because there is much written about the subject (usually pro-leasing), but, you have to make the decision that suits your needs best. Arm yourself with knowledge, make a educated decision, and act on it. Re-assess after ample time has passed, and learn from the whole experience.
