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The
IRS’s decision to allow taxpayers with leased vehicles to use the
standard mileage deduction has reduced much of the income tax impact.
However, there are still several factors to be considered.
The
most important decision is at the time of acquisition of the automobile.
An election must be made as between using the standard mileage or the
actual costs. This is important because not only does it affect your
tax treatment in future years but also the amount of paperwork to
substantiate your automobile deduction. If the vehicle is leased,
then the election is permanent for the entire lease, including renewals.
If you own the car and elect to use the standard mileage rate the first
year, you have the option of changing to actual costs in future years.
The only limitation being that you must calculate the vehicle’s
depreciation using the straight-line method.
Financing
a purchase of an automobile will give you an interest deduction from your
business income equal to the percentage of business use of the automobile
times the yearly interest paid. If electing to use actual costs,
this could result in a substantial deduction from you business income.
The downside is that you may be required to make a large down payment and
have a large monthly payment. The lease payment has an implicit
interest payment, but may not require much of a down payment and has
smaller monthly payments.
You
do not claim depreciation on a leased car and there is no depreciation
recapture when you exchange one leased vehicle for another.
Additionally, no basis calculation is necessary to determine gain or loss
since there can be no gain or loss with a leased vehicle. This is
not the case with a purchased automobile. You must take into
consideration the depreciation limitations placed on automobiles.
When exchanging one car for another new car, the basis calculation of the
new car could become very complicated if you switch from the standard
mileage to actual costs.
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