Q: I own an event- and destination-management company and am interested in buying or leasing a company car for one of our employees to use. I need any advice you can give me on buying vs. leasing, and what taxes this move will incur.
-- P.L., Gloucester, Mass.
A:Whether to lease or purchase typically depends upon how long you plan to keep the car and how much mileage it will accumulate. Other considerations you should take into account, obviously, are the monthly payments and the buyout price at the end of the lease. When you visit a dealership, the sales staff should be able to do a lease-vs.-purchase calculation that will be helpful.
As a general rule, experts say, if you will keep the car for five years or more, it's smarter to buy. If you expect to change it every three or four years, you're better off with a lease. Likewise, if you anticipate that your employee will put major mileage on the car, leasing is the way to go. Just pay attention to the mileage limit in your lease agreement: If you go over it, or the car incurs any damage, you'll be hit with an extra charge at turn-in time.
Tim Jacobs, owner of Design Group (www.thedesigngroup.com), a Minneapolis special-event company, prefers to lease. "If I want to provide an employee with a vehicle and want less upfront costs and a lower down payment, then a lease is perfect," he says. "It also maintains smaller monthly expenses and I would likely change the vehicle every three years [anyway]. The payments are charged as expenses and there are fewer accounting impediments."
Regardless of whether you lease or buy, a car can be a headache: You face potential liability if your employee has a traffic accident, and your company will have to purchase automobile insurance. Also, if you buy, you'll have to sell or otherwise dispose of the car when you no longer want it.
"My advice would be to have your employee buy or lease the car, and then reimburse that employee for costs," says Alan Weiner, a CPA and partner at Holtz Rubenstein Reminick, an accounting firm based in Melville, N.Y. "But if the employee owns or leases the car, there's less likelihood of employer responsibility in the case of an accident. (This may depend on whether the car was being used for business at the time of the accident.) Also, if the employee resigns or is fired, you won't be left with having to dispose of the vehicle."
If you decide to lease or own, as opposed to having your employee do so, you should become acquainted with the depreciation rules for luxury and nonluxury automobiles. You can read up on the rules in IRS Publication 463 and IRS Form 4562.
You should also buy a mileage log that you keep in the car, and have your employee do the record-keeping necessary to account for business use of the vehicle. When the car is used for business purposes, the miles should be logged and the destination and purpose of the trip noted. If the record-keeping is insufficient or nonexistent, the IRS could decide that business use of the car hasn't been substantiated, which would invalidate your auto expense deduction -- and leave you spinning your wheels.
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