2084: [Part 2] Can You Lease Your Car to Your Business? by Dr. James M. Dahle of White Coat Investor on Understanding Car Leasing

[00:00:00] Hey sweetie, your mother showed me this Carvana thing for selling the car. I'm gonna give it a try. Wish me luck. Me again. I put in the license plate. It gave me an offer. Unbelievable. Okay, I accepted the offer. They're picking it up Tuesday from the driveway. I haven't even left my chair. It's done. The car is gone. I'm holding a check. Anyway, Carvana, give it a whirl. Love ya. So good, you'll want to leave a voicemail about it. Sell your car today on Carvana. Pickup fees may apply.

[00:00:30] This Father's Day, do more with dad and spend less with low prices guaranteed at the Home Depot. Get him fired up with a new grill and accessories like the next grill five burner for just $299 so you can spend more time together while he becomes the grill master he was always meant to be. Or build memories with savings on top brand power tools so you can tackle projects side by side. Gift more and do more together this Father's Day with help from the Home Depot. Exclusions apply. See homedepot.com.

[00:00:58] This is Optimal Work Daily. Can you lease your car to your business? Part 2 by Dr. James M. Dolly with WhiteCoatInvestor.com. Should you own or lease your business car?

[00:01:14] Let's get to the second question. Should you own or lease that car you are using for business purposes? The general answer here is to own. In the long run, owning a car is usually a better financial move than renting it. Renting can obviously work out better in the short term. There's a reason we all rent a car when we go to Hawaii. But the longer you have and use the car, the better owning works out.

[00:01:36] The reason why is simple. Car rental and car leasing companies stay in business because they are profitable. That means that after all of the expenses of buying, maintaining, renting, and selling their cars, there's still money left over. That's the money you save when you own the car instead of renting or leasing it. This is why Dave Ramsey calls it a fleece rather than a lease. It's because you're paying too much for what you're getting. However, I suspect there have been some gears turning in your head. You've been thinking,

[00:02:05] well, if the lease payment is deductible but the purchase of the car isn't deductible, then maybe leasing can come out ahead after tax. Or if I'm purchasing, maybe I should do so with a long-term loan so I can deduct the interest. What you are forgetting here is the principle I discussed earlier. That you generally do not come out ahead by spending more money just because that money you spent is deductible.

[00:02:27] If you must spend the money, then try to make the spending deductible, but don't spend extra on a lease or car loan interest just because it is deductible. At any rate, if you need the car for any significant period of time, in other words, long enough to justify the transaction costs, which is a much shorter period of time than a standard 36-month lease, whether for personal or business use, buy it. Depreciation is a car expense.

[00:02:54] The answer to the, I can deduct a lease but I can't deduct a purchase crowd is that you can deduct the purchase. It's called depreciation. Now, this is only if you have chosen to deduct the actual expenses instead of the standard mileage deduction. But if you have chosen to do so, then you can calculate the depreciation on the car and deduct the percentage of that used for business mileage. Of course, any excess depreciation must be recaptured at the time the car is sold. How much is depreciation?

[00:03:24] The total amount is the amount you paid for the car minus the amount you sold the car for. The only question is how much of that deduction you can take in any given year. You can actually take quite a bit of it early on under current law, thanks to additional bonus depreciation laws. Per the IRS, you can take the following amounts for a passenger car in 2022. Year 1, $19,200. Year 2, $18,000. Year 3, $10,800.

[00:03:54] Year 4 and beyond, $6,460 per year. Those are huge deductions, right? Yeah, they sure are. But they can't add up to more than you paid for the car. And when you sell a car, assuming you have not fully depreciated it, you basically have to give back the value of your car upon sale as depreciation recapture.

[00:04:13] The IRS also has a method of reducing your lease deduction, inclusion amounts, a bit, to make the deduction similar to what one would get had they actually purchased the car instead of leasing it. The bottom line is that you are not penalized for buying the car, and you're not penalized for buying it with cash. The tax deduction for business autos is basically equal whether you lease, buy, or finance the car. Incidentally, if the car weighs more than 6,000 pounds, there is no annual cap on the depreciation.

[00:04:42] You can depreciate it all in the first year. That's nice, but it doesn't change the total deduction there, just when you take it. Lease backs There is one other trick. You can buy the car and then lease it to your business. Now, the deduction your business gets is precisely equal to the income that you get, so this arrangement won't change your income taxes. But it could potentially reduce payroll taxes, since that self-rental income is not subject to them, and your business income might be. Unless you're an S-corp.

[00:05:12] You do have to use fair market lease rates. One accountant who ran the numbers here for a sole proprietorship figured you could come out ahead doing this if you were driving less than 11,000 to 15,000 business miles a year. Although the savings weren't more than $1,000 per year in any of the examples. I don't find the savings from this technique to be worth the effort. The juice just isn't worth the squeeze for a high-income professional. Even the accountant lists one of the benefits as, quote, It seems exotic.

[00:05:41] It seems like a cool thing to drop at a party as a genius idea, but in the end, it might not be all that. But looking smart can be better than being smart. End quote. Who needs that? I don't. If you want something to brag about at a cocktail party, why not talk about your latest crypto purchase? Or how you're shorting crypto, depending on what the crypto markets have done lately. Physician Car Leases Leasing a car is still generally the most expensive way to own a car.

[00:06:09] The second most expensive way is to buy a car and sell it every 36 months. If you can afford to turn over your cars that quickly, maybe leasing isn't so bad. It's only a little worse. I mean, you can't take the money with you. We all spend money on stupid stuff. I might spend mine on trips to Costa Rica and gas for my wakeboat. You might spend yours on a lease or a new car every three years. So long as you're reaching your financial goals, I think it's fine. But don't go thinking you're financially savvy for doing so.

[00:06:38] Those people at the cocktail party listening to you brag about this complex lease of yours are only nodding their heads because they're either not financially sophisticated or they're just being nice. The Bottom Line The personal finance gurus are right. Leasing still doesn't make sense, even if the lease is deductible. If you're a doctor, lawyer, or similar high-income professional, there's little reason for your business to buy a car, much less lease one. However, you should be sure to claim your business mileage expenses if you have any.

[00:07:07] Keep a log with the date, miles, and purpose for the trip in case of an audit. If you're writing off the entire expense of your quote-unquote business car, despite putting lots of personal miles on it, you're a tax cheat, and I hope you get caught. You just listened to part two of the post titled, Can You Lease Your Car to Your Business? By Dr. James M. Dahle with White Coat Investor This episode is brought to you by Google Chrome.

[00:07:37] You think you know a browser, but Gemini and Chrome? That's new. It can help you with practically anything on the web, like restoring a vintage motorcycle from a 50-page restoration block, or finally break down that long article you've had open for weeks. Gemini and Chrome is here for it. Ready to make anything online make sense? There's no place like Chrome. Check responses set up required compatibility and availability varies 18+. Good sleep is everything.

[00:08:02] That's why Olly's Science Back Support is made with a blend of melatonin and L-theanine for both kiddos and grown-ups. So when your mind won't switch off, you've got something that can help. Erasing thoughts and restless nights won't stand a chance. Find Olly's Sleep Solutions for the Whole Family at Olly.com. That's O-L-L-Y dot com. And thanks once again to Dr. James and the site that he founded, White Coat Investor, for letting us share this post.

[00:08:30] Whether you learn best from a blog, a newsletter, book, podcast, videocast, online course, social media, forum, or live conference, the White Coat Investor is here for you. Doctors and other similar high-income professionals provide important benefits to society, and the White Coat Investor can help you to become financially literate and disciplined, which will allow you to spend your time and effort on your patients, your family, and your own wellness.

[00:08:56] They truly believe that a financially secure doctor is a better partner, parent, and practitioner. So come by whitecoatinvestor.com to learn a lot more. And that's it for today. I thank you so much for being here with me and being a subscriber, and I hope to see you back here tomorrow, where your optimal life awaits.