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Accountant's Corner
Tax Rules for Leasing a Business Vehicle
By Ronald L. Noll, MS, CPA

Ron Noll Last month's column covered some general points regarding the lease or purchase of a vehicle for your business. This month's column will take a closer look at some of the tax rules that are relevant to leasing a business automobile, truck or van.

One reason leasing is so popular is that it "feels" like buying. You make monthly payments, buy insurance, pay for gas, oil and repairs, etc. But when it comes to your Federal taxes the rules are different when you claim lease expenses.

Whether you lease or buy, your vehicle is deductible to the extent that it is used for business. For instance, if it's used 75% of the time for this purpose, then 75% of your expenses can be claimed. Leasing doesn't change this. Taxpayers who claim deductions for leased autos are also subject to similar personal-use and luxury-auto use limitations that are imposed on autos that are owned. This ensures that taxpayers who own their business autos and those who lease their business autos are treated the same under tax law.

Leasing does affect the methods you may use to compute the amount of your tax deduction, since you cannot use the Standard Mileage Method to account for business expenses when you lease a car but must use the Actual Expense Method. Actual expenses include car washes, gas/oil, insurance, maintenance/repairs, tires, lease/rental fees, garage rent, licenses, parking fees, tolls, and depreciation.

Depreciation

Depreciation is handled differently for vehicles than for other business property. Because vehicles can be used for both personal and business purposes, they have expense limits imposed on them which do not apply to machinery, computers and general office equipment. In calculating the depreciation allowance, an automobile is treated as an asset with a 5-year recovery period. Under the regular depreciation tables, such assets are actually depreciated over a 6-year span because depreciation starts in the middle of the first year and ends in the middle of the sixth year. The percentages for each year vary, as follows:
Year 120%$3,160
Year 232%$5,000
Year 319.2%$3,050
Years 4-511.52%$1,775
Year 65.76%$1,775 and on for lifetime of vehicle


The above figures assume 100% business use. These percentages are not available for cars used 50% or less for business purposes. For these, straight-line depreciation is required.

If the car is used partly for business purposes and partly for personal purposes, the limits are reduced to the business percentage. For example, the maximum depreciation deduction for a car used 75% for business is $2,370 (75% of $3,160) for the first year. The personal 25% portion ($790) is disallowed.

Depreciation deductions allowed are artificially low for purchased company autos that fall into the luxury class. And if you lease a luxury company vehicle, it will wind up with a special add-back to income, called the lease inclusion amount, that varies with the value of the car and the year of the lease. If a vehicle is leased for a lease term of 30 days or more after 12-31-86, an annual income inclusion amount must be computed if the Fair Market Value of the car exceeds:

$12,800 for 1987-1990
$13,400 for 1991
$13,700 for 1992
$14,300 for 1993
$14,600 for 1994
$15,500 for 1995-1996
$15,700 for 1997

Valuing an Employee's Vehicle Use

You can choose among several methods for valuing the personal use of a car that must be reported as income to an employee.

Fair Market Value method: The business determines how much it would actually cost an employee to lease a comparable car on comparable terms. This value is then multiplied by the percentage of personal use to arrive at the taxable value. As the cost of leasing a car has dropped, this method has become more attractive. And it is likely that this method may produce the smallest tax bite of any of the methods available.

Cents Per Mile method: The business multiplies the number of personal miles by the standard mileage rate of 31.5 cents per mile for 1997. If your employee pays for gas out of his or her own pocket, the rate drops by 5.5 cents a mile. One advantage of this method is that it is simple; however, it is not available on many cars, nor can it be used if the cost of the car exceeds $15,700 for 1997. This method also cannot be used unless the employee regularly uses the car for business driving throughout the year, or the employee puts a total of 10,000 or more business miles on the car during the year.

Table Value method: Like the Fair Market Value method, this method is keyed to the cost of leasing a car. However, instead of having to determine what it would actually cost the employee to lease the car, the business gets the cost from a table issued by the IRS. This method can be used for both expensive and inexpensive cars. The lease table value depends on the fair market value of the vehicle at the time it is first placed in service.

Commuting Valuation method: This method cannot be used by owners, directors, or highly paid employees or officers. Furthermore, it is only available if your restaurant limits the personal use of a car to commuting. In this situation, your restaurant can value the personal use at a flat $1.50 per one-way commute ($3 per round trip).

Keep Good Records

It is important to keep good records for all of the expenses noted above, along with a record of total miles driven for the year, total business miles driven for the year, total commuting miles driven per day and for the year, and the date the vehicle was placed in service. This allows your accountant to complete your tax forms accurately and provides proof of your expenses if they are challenged. Keep your records current on at least a weekly basis. Remember, you can't use estimates or approximations to prove your restaurant's vehicle expenses.

Since the rules covering the tax deductions for vehicles leased for business purposes are complicated, seeking the advice of a tax professional who understands your business will help you better understand the tax implications of leasing a vehicle.


Ronald L. Noll, MS, CPA, is President of Noll & Company, Inc., a Certified Public Accounting firm in Malvern specializing in restaurant accounting. If you have suggestions, questions or comments, please send them to Noll & Company, Inc., Certified Public Accountants, 18 E. Lancaster Avenue, Malvern, PA 19355, or call us at (610) 644-3750.




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