: Car Lease Deduction for Business..What makes sense



$teve
2011-02-12, 05:01 PM
Hi

I have a question for you tax experts out there.

We are in need of a new second car. My beater is slowly becoming a money pit.

I have read many articles that suggest buying is always better than leasing a vehicle if you are the type to hold on to your car until it is run into the ground.

Does this still hold if you can expense the cost of the lease for business purposes...or at least part of it. My wife will be setting up a business and will be using the car at least part of the time for going to and from the business.

Thanks in advance

plen
2011-02-12, 05:15 PM
Check out this page (http://www.smallbiz.ca/2006/07/03/should-you-buy-or-lease-your-car/), specifically the sections on advantages and disadvantages of both options and see how they fit your needs and your small business.

MoneyGal
2011-02-12, 06:15 PM
That page is a little out of date - the upper limit on capitalization of cars has changed since 2006.

The biggest factors are (1) the rate of return you could earn on the money used to buy the car compared to the interest rate on the lease (2) cash flow considerations and (3) the proportion of expenses against the car that can be deducted.

Honestly, in all likelihood the simplest way to figure this out is to use a tax preparation software package to estimate the likely tax deduction for the car in both scenarios, and then go from there.

sprocket1200
2011-02-13, 11:36 AM
there are strategies to be used. first off don't lease a new car, lease a used one (lots with warranty still). the depreciation of new is mind boggling. if you decide to lease a new one, then you aren't trying to save money and don't need our help...

now, for your used lease, the KMs driven don't matter (since you are going to buy the car anyway), the cost of it does, and you will need to find a lease cost calculator so you know what you are doing at the dealership.

I could only find cra info stating $800 plus taxes can be written off. when I did what you are trying to do, my calculations indicated that vehicles approaching no more than $40,000 were the best value for this strategy. of course, less is better as it reduces your costs.

now, for the car you want, you already know the payment ($800 plus taxes), and you need the cash flow to do it, but only until tax time when you will be paying less tax. when at the dealership you tell them this will be the payment, they can make the payment this much by 'buying kms'. they have a rate and just keep adding kms X the rate until it is nearly $800 for the payment. your lease calculator will help explain how this works. remember the actual amount of kms driven or used for calculation doesn't matter.

the lease calculator also has another very important figure you need to understand, and that is the residual value. since you are 'buying kms' the 'expected value' or residual will be much lower for the lease. this means at the end of the lease you will be buying the car for a much lower amount.

our example was a one year old car leased for 3 yrs. was $33,000 and paid $902 per month ($800+tax). after 3 yrs the residual value was $8000 and we paid this plus tax to buy out the car. at the time the market price was about $17,000.

the number of kms didnt matter (our happened to be low like 60,000kms) as we bought the car. we did this purchase in 2001 and still own the car. it runs like a champ!

there wasn't the cheap lease rates there are now so we paid 9%. now you may be able to lease a car with the cheap rates and that may affect the value you can get.

don't forget, after you buy the car, then you can depreciate it and, of course, write off all repairs, maintenance, etc.

you will have to hold their hands on this. they do it very rarely as nearly everyone is 'afraid of the kms'. when talking with associates that is all they could focus on and I don't know anyone else that did what we did. i do know many people who keep buying new cars though. they are also still working.....

MoneyGal
2011-02-13, 12:06 PM
when I did what you are trying to do, my calculations indicated that vehicles approaching no more than $40,000 were the best value for this strategy. of course, less is better as it reduces your costs.


CRA will only allow you to deduct lease costs on a car with a value of up to $35,294 + tax. Here's the specific chart from CRA to calculate eligible leasing costs:

http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns206-236/229/mtr/lsng/charta-eng.html

$teve
2011-02-13, 03:18 PM
Thanks Moneygal

Sprocket1200, interesting approach, I will have to look into it this year and approach a couple of dealerships on this.

sprocket1200
2011-02-14, 02:38 AM
CRA will only allow you to deduct lease costs on a car with a value of up to $35,294 + tax. Here's the specific chart from CRA to calculate eligible leasing costs:

http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns206-236/229/mtr/lsng/charta-eng.html

yes, that's why above $40,000 doesn't give you an advantage. at 12% tax (here in BC) the total is almost $40,000. line 6 says the greater of line 4 or 5. but the rest of the calculations limit your benefits.

so line 4 is 40,000, line 5 35294+tax. same diff.

sprocket1200
2011-02-14, 02:39 AM
Thanks Moneygal

Sprocket1200, interesting approach, I will have to look into it this year and approach a couple of dealerships on this.

it worked awesome, just be aware the dealers will be confused at what and why you would do that. they think $900 payment on a lease is insane. I just haven't been able to bring myself to sell the vehicle at the low residual value and have the gov't help me buy another car all over again. I am just too cheap!