Buy or Lease a Car

I’ve been getting many questions on to buy or lease a car/truck/SUV.

Last year, the question was clear, if you used your car for business, it was better to buy, you got an additional 11K in depreciation (2009).  For SUV or trucks over 6,000 lbs , if used 50 percent for business, you can take an additional $25,000 in depeciation + bonus depreciation (take another 50% off the cost basis for depreciation) in 2009.  SO BUY was best for tax purposes.

This year (2010), the SUV or heavy truck over 6,000 lbs still exists for the 25,000 depreciation but no bonus depreciation.  This tax break is still helpful and would be enough for a buy recommendation on an heavy SUV.

For autos, SUV’s , trucks under 6,000 lbs in 2010, lease or buy is not apparent.  Leasing if 80% or more used for business, would probably generate a higher deduction than depreciation because depreciation would only by $2400 up to $3060.  The issue with leasing is that the 20% used for personal has to be included in income for the driver of the vehicle as compensation (W2) income.  In practicality, this issue is rarely addressed by the IRS, but technically you have to include this income. So I usually recommend still to buy rather than lease even with the better deduction because of this lease inclusion problem.

As for the difference in cost, it’s hard to compare leasing with a purchase because of the remainder value( option to purchase at end of lease) that is built into lease.  But what I have noticed is that if you exceed your lease mileage consistently on an annual basis , the lease penalty is steep and would render it more costly than a purchase. Also the annualized interest rate on a lease or implied rate can be slightly higher to compensate for the option to purchase.

In summary, buy is the recommended decision in 90% of cases, lease would work best if 100% is used for business, (company lease) so you don’t have to worry about lease inclusion for the driver of the vehicle.