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By Milgrom, Galuskin, Rosner & Co.
I am frequently asked whether an automobile should be leased or purchased. Unfortunately, the answer is not uniform, and needs to be evaluated on a case-by-case basis. Several different circumstances need to be addressed before answering this question. One should always keep in mind that leasing is merely a financing alternative. Keep that perspective.
If the automobile will be owned by a corporation and be used for business, the tax consequences take on added importance. If the automobile is going to be used personally, interest rates and your preference for turning cars over should be considered. Cash flow is usually an important consideration. One technique I might suggest is to negotiate the price of the automobile without regard to the financing method. Financing is a separate issue.
For a vehicle that is purchased and used 100% for business, the Internal Revenue Code has limits on annual depreciation deductions. Under these rules, it will take many years to write off an expensive luxury auto. If the corporation finances the auto that is used 100% for business, the interest paid will be fully deductible. If the business leases the car, it can deduct the full payment,
subject to an addback of an amount taken from an IRS table multiplied by the business-use percentage. From a tax standpoint, it is generally more advantageous for a business to lease a vehicle than to purchase.
When an individual is going to be using the car for personal reasons, there are no tax consequences. Neither the interest paid on a financed auto or the lease payments on a leased auto is tax deductible to the individual. The interest rate you pay when you purchase an automobile is usually disclosed whether you finance through a bank or through a dealership. The implicit interest rate on a leased automobile is not usually disclosed. However, it certainly can be calculated. The interest rates on leases should approximate those offered by lenders of auto loans. However, I have often seen them exceed lender's rates.
In addition, the consumer must consider the length of time that he or she intends to keep the car. If the intention is to keep the car for a long time, perhaps five years or more, a purchase would probably be more favorable. This will give you a few years with no payments.
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