lease vs finance: help with actual numbers for tax implications

[Slav4ikMD]

I know this topic has been discussed dozens of times on each and every forum, but I was hoping someone could help me with the actual math for a specific situation.  So far I've either driven old cars or financed new ones, never leased, mostly because I find it to be somewhat annoying from a psychological standpoint, BUT I want to be able to understand the specific math and see if it MIGHT indeed make sense for me to lease.  Basically I want someone to convince me that leasing MIGHT indeed be a better option for me.

So let's take my specific situation, with some rough realistic numbers:  option 1) lease a 2017 car for $800 a month, nothing down, and then say in 3 years do the same 2) finance maybe a 2014-2015 car, same model, with an $800 a month payment for say 5 years and trade it in in 6 years.  +/-, these are not exact numbers, but ballpark.  Basically looking to get a reasonable luxury car, car will be driven 50% for self-employed business related trips, I am in the 33% tax bracket.  (Driving a new car every 3 years per se is NOT important to me, and I realize that OVERALL financing a used car is "cheaper" but my goal here is to find out what my "savings" in terms of taxes will be.)

For leasing, if I understand this correctly I would basically I will deduct 50% of the $800, so will save taxes off the $400 a month, thinking simplistically?  vs how do I estimate what the actual $ savings would be off depreciating a financed car?

Thanks!

[Slav4ikMD]

I should probably reiterate my take on this and purpose of the question:  I believe that OVERALL, regardless of the taxes situation, it makes most sense (to me) to get nice CPO cars and drive them to the ground.  The reason I ask the question is 1) I'd like to be able to better understand how much am I actually "saving on taxes" by doing it this way and 2) how much "more" would I save if I were to lease, thereby potentially being able to better justify what I consider a splurge.

[Zaphod]

Slav4ikMD wrote:

I should probably reiterate my take on this and purpose of the question:  I believe that OVERALL, regardless of the taxes situation, it makes most sense (to me) to get nice CPO cars and drive them to the ground.  The reason I ask the question is 1) I’d like to be able to better understand how much am I actually “saving on taxes” by doing it this way and 2) how much “more” would I save if I were to lease, thereby potentially being able to better justify what I consider a splurge.

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In the end I have looked at it one way, but its been a while. If you consider x$/month that you can spend, its really the write off portion that allows you to basically get a nicer car for equivalent after tax payment. I think I concluded it didnt really matter whether you owned or leased, you could write off a portion no matter what (whole payment vs. depreciation/expenses) but overall owning is just plain cheaper. I went with a 1 year old used car which has worked out well. I dont like the idea of always having a payment like perpetual leasing gives you.

[Slav4ikMD]

Thanks Zaphod.  That's my gut feeling too, buying CPO and keeping for a few years but not way into the ground sort of makes the most sense to me, but I am trying to find a way to figure out the actual math.  Do you know if there are any calculators for this?  Not just buy vs lease calculators, but where you can plug in your specific financial situation?  But again, sort of approximating the numbers in my mind (likely with some incorrect assumptions), I figure I am "saving" around $150 a month on the car via taxes no matter which way I go about it.  So far, I don't think I've ever had a car where my "monthly cost of ownership" was over $400, and I just don't think leasing an $800 car will get me that no matter what I do.

[StarTrekDoc]

Model X --  via the small business;  $25,000 accelerated depreciation-- the old HUMMER loophole.

[Zaphod]

If you lease you get to write off the whole payment. However, your upfront costs are higher too. I've had a hard time believing there is a real actual net benefit (which makes sense) aside from getting something you already want with a little discount, which is fine.

Never pay more because you get a tax deduction unless its what you were doing in the first place. Im sure there are some calculators out there that simply take your marginal rate and do the deed.

[Slav4ikMD]

Zaphod, I agree with you 100%.

Trying to do the math as I am writing this, and really I am coming to a conclusion that leasing for me makes sense only if 1) I were to get an ultra expensive car which would be just a splurge (I was offered a very good lease deal on a GLS AMG which sort of got me thinking, but I think it would just be ridiculous to get it at this point) and 2) if I were in a situation where I could deduct the car 100% for business (which I know some people do, but I prefer to be entirely honest with this sort of stuff.)

When I do the math for a nice car, on average leasing still comes out about $200 a month more for average cost of ownership than financing CPO and keeping for 6 years.

[janettebournes]

Slav4ikMD wrote:

Zaphod, I agree with you 100%.

Trying to do the math as I am writing this, and really I am coming to a conclusion that leasing for me makes sense only if 1) I were to get an ultra expensive car which would be just a splurge (I was offered a very good lease deal on a GLS AMG which sort of got me thinking, but I think it would just be ridiculous to get it at this point) and 2) if I were in a situation where I could deduct the car 100% for business (which I know some people do, but I prefer to be entirely honest with this sort of stuff.)

When I do the math for a nice car, on average leasing still comes out about $200 a month more for average cost of ownership than financing CPO and keeping for 6 years.

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I think this is what it boils down to. If you are leasing a very expensive car and you are legitimately using it for a high % of business use, then you might come out ahead when leasing.

Otherwise, financing CPO and keeping it for 6 years will likely be cheaper.

Both methods are still expensive ways of paying for transportation (the best method as you mentioned, would be to pay cash for a CPO car and drive it into the ground) so if your financial house is in order and you are lucky enough to choose between the two, this might be another situation where I wouldn't let the tax tail wag the dog.

If you like leasing and driving a new car every 3 years, I would go that way (this is what my husband and I have opted to do)

If you don't like leasing and prefer owning, I think financing the CPO car and keeping it would provide fewer headaches.

[Slav4ikMD]

Thanks.  I've never leased so I wouldn't know.  But I suspect it would drive me nuts (keeping in mind mileage limits, worrying about scratches and small dents and knowing that there is a specific time when I will need to get a new car and be less flexible about it).  Most of my friends lease and loving it, but that doesn't say much.  Everyone seems to be deducting the whole car as a business expense, but I am not as gutsy.

[janettebournes]

Slav4ikMD wrote:

Thanks.  I’ve never leased so I wouldn’t know.  But I suspect it would drive me nuts (keeping in mind mileage limits, worrying about scratches and small dents and knowing that there is a specific time when I will need to get a new car and be less flexible about it).  Most of my friends lease and loving it, but that doesn’t say much. ?  Everyone seems to be deducting the whole car as a business expense, but I am not as gutsy.

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It certainly varies from person to person

We don't drive much so the mileage limits usually don't restrict us much

Worrying about scratches and dents can be annoying as well, most companies are fairly reasonable with what they consider to be normal wear and tear (anecdotally, our Mercedes dealership gave us a very tough time on one vehicle and we haven't gone back to them. Our BMW dealership has been very generous with what they consider to be acceptable wear and tear after 3 years)

Timing the swap of the lease can be a hassle (my husband refuses to do the 2 year leases for this reason) but most dealerships will let you extend for 1 - 2 months at the same rate if you give them advance notice

Not a CPA, but I've heard claiming 100% business use can be an audit flag

[Zaphod]

Being in Cali we tend to drive a lot more than when we were living other places and typical lease mileage whouldnt cut it. Although I was a resident so there wasnt time to do so. Just a couple weeks ago someone bashed into my car in Santa Monica and of course there was no note or anything. The next day I was just, hmmm, whats this...OMG! Always annoying, but when not leased it doesnt bother me as much.

[DMFA]

GLS 63 AMG? A $125,000 car? Yikes. That's a house.

[Slav4ikMD]

Well, and I won't be getting it.  Maybe in 10 years.

Although it typically leases for over $1500 a month and I was offered it for $1100, so it's not THAT bad for 3 years of pure joy.  But no, not doing it.

[bjbanjo]

A real advantages of leasing a new car is that you get the latest safety features, which would be advantageous if new drivers (teens) will be driving, and avoiding steep depreciation on a new one.  But don't borrow:  Either buy an affordable low-mileage, reliable, used car, or pay cash on a new one.

[Craigy]

$1100 for a GLS63 isn't terrible but don't let a good deal make you do something you ordinarily wouldn't have.  I want to say I looked at GLS550 deals a few months ago and they were in the realm of $799/mo.  What you can and can't deduct is a question for your CPA.

Buy seems to be much better in the lease vs buy math, but with German luxury brands you're looking at very steep depreciation, even moreso for AMG, so the lease vs buy numbers are more of a wash.  Also, you probably don't want to be fixing one of these cars out-of-warranty in year 5 or 6.

Leases tend to be popular with high-end luxury since people dropping six figures on brand new luxury tend to want to keep getting into another brand new luxury vehicle.  If you're someone who wants to trade in every 2-3 years, a lease is a lot easier since you don't have to negotiate trade value or deal with selling it yourself, you just turn it in.

End of the day, IMO the savings buy vs lease on something like this isn't really worthwhile.  Your purchase payment isn't building any equity, and even if you pay with cash, your cash investment is vanishing in value every day.  You're throwing something like a grand a month down the depreciation hole or the lease payment hole, and buying may or may not save you a few dollars.