2083: [Part 1] Can You Lease Your Car to Your Business? by Dr. James M. Dahle of White Coat Investor on Understanding Car Leasing

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[00:00:52] This is Optimal Work Daily. Can You Lease Your Car to Your Business? Part 1 by Dr. James M. Dahle with White Coat Investor.

[00:01:05] I often hear docs and other small business people mention how they're so smart for having their business lease their car. While I'm sure there is a situation where this has worked out well, most of the time it is a mistake and most of those who are not convinced that it is a mistake are cheating on their taxes. Let me explain.

[00:01:24] Separating the issues. There are really two issues to talk about here. The first is whether your business should own or lease a car or whether you should do it personally. The second is whether the car should be purchased or leased. It's important not to conflate these two issues. Before we get to those questions, you need to understand some background information about how this stuff works.

[00:01:46] Business deductions are the best kind of expense. Any expense in your life that can be taken as a business expense should be taken as a business expense. You see, a business expense comes right off the top. It's even better than an above-the-line deduction. It gets deducted before your personal income is even calculated on your tax form. Business expenses are directly subtracted from business revenue before calculating profit. You never pay payroll taxes on that money, much less federal or state income tax.

[00:02:15] It is truly spending pre-tax money. That said, you're still spending money. You are not financially better off after a $1,000 expense because you can write it off. You are still 1,000 times 1 minus your marginal tax rate poorer afterward. How to deduct car-related expenses. A lot of people misunderstand how car-related expenses work when it comes to taxes. At the end of the year, you add up all the expenses of running that car.

[00:02:42] Then you add up the total mileage you drove during the year. Then you add up all of the business mileage you had during the year. You divide the business mileage by the total mileage, and then multiply by the total expenses, and that's your deduction. Total expense times business mileage divided by total mileage equals business mileage deduction. There is another, simpler alternative. You can just take the standard mileage deduction, which is $0.62.5 per business mile driven.

[00:03:11] But you can't take both. It's one or the other. It usually works out better to take the mileage deduction for an older, inexpensive, or paid-for car, and to take the actual expenses for a newer, expensive, or leased car. But you should run the numbers both ways. Remember that interest on a car loan is deductible, but the principal portion of the payment is not. However, the entire lease payment is mostly deductible. The most important thing for you to realize here is that only business mileage is deductible.

[00:03:40] Personal miles are not deductible. Commuting miles, in other words driving from home to your job, are not business miles. So what are the business miles for a dock? If you go to three hospitals and a clinic each day, the drive between home and hospital one is not deductible, and neither is the drive from the clinic to your house. But driving from hospital one to hospital two, and from hospital two to hospital three, and from hospital three to the clinic is business mileage.

[00:04:09] People might try to game this system by claiming that one of their work sites is their home office. They even claim the home office deduction to try to justify this. Remember, a home office must be used regularly and exclusively to take that deduction. But you are not required to take the home office deduction to claim your home as a business site. Note that the home office must be used in the same industry as the hospitals and clinic to claim these miles. You can't work on your little blog at the home office and then drive to the hospital and claim those are business miles.

[00:04:39] If you do try to claim these commuting miles, you'd better document the work you do each time you are in the home office before and after your real job. I think this idea is ripe for a losing audit for most docs, and I wouldn't try it. I really don't think the auditor is going to allow you 80 miles of business mileage deduction per day just because you check your email immediately before and after work. But you can try if you want. Should you or your business own or lease the car?

[00:05:06] Okay, now that you have the background information you need, we can talk about whether the business should own or lease the car, or whether you should own or lease it personally. From the equation, it doesn't matter from a tax perspective. If the business owns it, you can deduct the business mileage or the percentage of the expenses used for business miles. If you own it, you can deduct the business mileage or the percentage of the expenses used for business miles. Same, same. However, there are two important considerations. Insurance and income.

[00:05:37] Insurance. Many insurance companies do not cover the business use of your car. If you hit somebody or wreck the car while driving it for business, you may just be out of luck. I looked up my policy with USAA. It covers my business miles, as long as that business isn't Ubering people around or renting out the car on Turo. Income. If the business owns or leases the car, you have to figure out a way to deal with the personal miles. Personal use of a company vehicle, including commuting to work,

[00:06:05] is a taxable business perk, and it has to be reported as income to the employee at least once a year. While the tax outcome is pretty much the same here as if you owned the car personally, it's a major hassle to keep track of all this for your business and report it. Far easier to just add up the business mileage. My general recommendation is to own the car personally and just take a business mileage deduction, or for an S-corp, reimburse yourself for those business miles, so long as your insurance will cover that business use.

[00:06:35] And if it won't, switch to a company that will. This will maximally simplify your life, especially if your car is not expensive, although it will not necessarily minimize your tax bill. To be continued. You just listened to part one of the post titled Can You Lease Your Car to Your Business? by Dr. James M. Dolly with WhiteCoatInvestor.com Study and play come together on a Windows 11 PC

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[00:08:02] who is a physician and he is the founder of The White Coat Investor. The White Coat Investor is the most widely read physician-specific personal finance and investing website in the world. It's the premier resource for high-income professionals looking for unbiased information about all things financial or simply a referral to a trusted professional providing good advice at a fair price. What started as a simple blog has grown into a multimedia company that will provide you the financial information you need in whatever format you prefer.

[00:08:32] To check out more from them, visit whitecoatinvestor.com. But I think that's going to do it for today. I hope you're having a great one and thanks so much for being here with me. And I will see you back here tomorrow for the remainder of this episode. And that is where your optimal life awaits.