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MAY 2003

GAIN MAXIMUM TAX MILEAGE:
HAVE YOUR COMPANY LEASE A CAR

The 2002 tax law enhanced your ability to depreciate a car bought for business between September 10, 2001 and September 10, 2004. But even with this tax break, leasing still provides more depreciation deductions than buying. Some of the reasons: 

•  The car's depreciation is built into the lease payment, and you can deduct a portion of the lease payment representing business use. If you lease a car for $500 a month and use it 75% for business, you can deduct $375 a month (75% of $500). 
•  Financing charges too, are built into the lease payment and are thus partially deductible. 
•  Owning a business car generates tax problems when you trade it in. In the IRS' wacky world, most cars are considered "luxury cars" (anything over $15,500), and depreciation deductions are restricted on such vehicles.
•   Beyond taxes, a lease is generally the better choice if you plan to trade in the car every few years. Buying might make sense if you tend to keep your business cars for many years.

Let the Company Lease the Car.

The best arrangement calls for your company to lease the car, make the lease payments and take a full deduction. In turn, you calculate your personal use and pay taxes on that. The taxable income you incur will be relatively small.

Having your company lease the car offers other advantages, too. Insurance premiums and lease payments may be lower, especially if the company is leasing more than one car.

If your company doesn't want to lease the vehicle, lease the car personally and set up a reimbursement. That way, the company deducts its outlays. To make sure your reimbursements don't count as taxable income, the company needs a formal accountable plan in place.

Worst Tactic: Own business car yourself

For an employee, the least tax-efficient approach is to use your own car on business and deduct business expenses on your personal return. If you do that, you can lose some key deductions because these costs are classified as miscellaneous itemized deductions.

Say you drive 8,000 business miles in 2003. Using the standard 36 cents a mile rate, that's a $2,880 expense which is considered an unreimbursed employee business expense.

The problem: Employee business expenses fall under miscellaneous itemized deductions, which you can deduct only after they reach 2% of your adjusted gross income (AGI). If your AGI is $150,000, the floor for deducting miscellaneous deductions would be $3,000 (2% of $150,000). So in this example, you wouldn't be able to deduct a dime of your business mileage.

Auto Leasing: 6 tricks of the trade.

1. Negotiate the price before negotiating a lease arrangement. This prevents the selling price from influencing lease negotiations.
2. Shop around. Dealers and manufacturers offer different lease rates and are willing to negotiate.
3. Read the fine print. Find out all hidden charges, eg., destination, security deposit, registration fees, lease-end service charges, etc.
4. Stipulate a closed-end lease. If the car's actual value at lease end is less than its residual value, the lessor pays the difference. You don't. Conversely, if the actual value is more, you have the option of buying the car for the fixed residual value and then selling it at profit.
5. Check on insurance rates for the coverage level required by the lessor. The lease agreement may require higher liability limits and lower deductibles than you currently carry, and both will increase your insurance premium.
6. Choose vehicles that tend to hold their value well. The sexiest cars are not always the best buys in the world of leasing.
   (Source: MSN, Research Recommendations-April 2003)