The topic of leasing vs. buying vehicles for your business is a hot one – especially in our current environment with costs higher than ever. This week, we’re discussing the pros and cons of both options, specifically when it comes to tax deductibility.
Topics we cover in this episode include:
- Leasing vs. buying a vehicle
- Lease value inclusion
- Capital lease vs. operating lease
- Sales tax considerations
- 168(k) bonus deprecation
- Percentage of business use, commuting, and tax home
- Have a written policy regarding personal use of company vehicles
- Depreciation recapture and when it comes back to bite you
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[00:00:00] Rob Williams: Welcome to the Contractor Success Forum! Today we’re discussing the tax deductibility of vehicles. On the Contractor success Forum, we discuss how to run a more profitable, successful construction business.
And with us, we have Stephen brown with McDaniel Whitley bonding, an insurance agency, and we have Wade Carpenter with Carpenter and Company CPAs. And I am Rob Williams with IronGate. Entrepreneurial Support Systems.
So welcome to our Contractor Success Forum today, and man, tax deductibility of vehicles, man. That is an old, great relevant subject.
[00:00:46] Stephen Brown: It sure is. And it comes up all the time. And everybody says, if you wanna know the answer to that, you have to ask your CPA. Well, you’re calling your CPA and that meter’s running for their expertise, but I can tell you the best expert I know on this subject matter is Wade Carpenter. And Wade, you’ve got some great advice for our listeners today, you know. And should you buy or lease a vehicle? As we talk about the tax deductibility, would you kinda walk us through this?
[00:01:12] Wade Carpenter: I’ll do the best I can. Before I get too deep into it, this is a question I get several times a month and I’m constantly answering the question, but I do wanna say upfront that what we say here, you should not go act on whatever we talk about today. Go talk to your own CPA. Tax laws change, you know, your particular situation. We couldn’t possibly talk about everything with vehicles in 30 minutes. So keep that in mind. Don’t act on anything without talking to your own CPA. And if you need a good one, I’d be glad to talk to you about it.
[00:01:45] Stephen Brown: Okay, fair enough. There’s a disclaimer. You might feel like making it three or four times through this podcast.
[00:01:51] Wade Carpenter: I might just do that.
[00:01:53] Stephen Brown: Hey look, thanks for taking it on.
[00:01:54] Rob Williams: Love our lawyers. Don’t we love our lawyers? Yeah.
[00:01:59] Stephen Brown: Well, how do you handle this? What’s the best way? What kind of questions do you get the most?
Leasing vs. buying a vehicle
[00:02:04] Wade Carpenter: Well, we get a ton of questions. I know you brought up the lease versus buy.
[00:02:07] Stephen Brown: Yeah.
[00:02:08] Rob Williams: Lease versus buy a vehicle. That is probably the oldest question. I think I’ve been going through that since I was even a teenager when I first started looking at that. Do you lease these things? And each year it seemed like a different answer once we learned one way because things changed.
[00:02:25] Wade Carpenter: Let me try to address that. There are two different things. You have the lease that typically is gonna cost you something less upfront and less payment, but you don’t own it at the end. And I wanna come back to this question of capital lease versus operating lease.
But you know, in a business you have the, do I own it? And from a contractor standpoint, if you own it or you’re going to essentially own it at the end of the lease, then it should be an asset on your balance sheet. And if you take a note out, you should also have a liability on the books. Versus a lease, typically you’re going to expense the lease payment Again, there’s a lot of things.
Lease Value Inclusion
[00:03:06] Wade Carpenter: One thing I wanna say up front with a lease payment on a vehicle, there is such a thing as lease value inclusion from the tax standpoint. So if you are getting some personal use out of a of vehicle that the company leases, then you should be charging the employee back, or the owner back, something for their personal use of it. And the IRS puts out tables on the least values of these things. So, there’s so many questions that brings up, but if you’re commuting back and forth–
[00:03:37] Rob Williams: Yeah. Just that one subject, it’s interesting when you say charge them back, does that mean you’re collecting money? To me when we would charge them back, we just reported it as income, maybe. We didn’t necessarily make him write us a check. We just had to say, here is a thousand dollars of income to you that we’re having to report because that’s personal use.
[00:03:58] Stephen Brown: I can tell you from an insurance standpoint, the insurance underwriters expect you to take that company vehicle home and park it. And especially don’t want anybody else in the family driving it to the store or out anywhere, but you know, that kind of stuff happens I’m sure. So it sounds kind of complicated, but it isn’t, is it?
[00:04:19] Wade Carpenter: Well, to answer Rob’s question, typically, we’re gonna report it on a W2. We have the lease value and then we have commuting miles. So what you said, Stephen, about taking that truck home at the end of the day, well, back and forth to your home is commuting.
So if nothing else you should be claiming a personal use on your W2 or somehow reimbursing it to cover the personal use of that. Because that’s not deductible to the company. Okay?
[00:04:51] Stephen Brown: A lot of project managers own their company vehicles. When they’re going from the job site home, sometimes it’s a considerable drive.
[00:04:58] Wade Carpenter: Yep. Well, I completely understand that and we can talk about what the tax home and all that stuff is. So there’s so many different things that this could lead to, but sticking with the lease versus buying. Let me first attempt to answer that. Again, if you’re buying it, it’s going to end up on your balance sheet as an asset and a liability if you owe on it. For a lease, it should be expensed. But again, that lease deductibility may be limited.
But on your financial statement, the only disclosure if you’re leasing it and you don’t own it at the end, or what’s called an operating lease, it should be disclosed on financial statements in the notes so that Stephen knows that you’ve got a monthly obligation for this.
[00:05:43] Stephen Brown: Right.
[00:05:44] Rob Williams: That’s a great point, because I remember thinking, wow, this lease, the way it’s written, this thing’s really just like a loan because I gotta keep paying this thing. It’s not like I went to Hertz and got a rental car for the day and I can return it tomorrow. I was obligated for years.
[00:06:01] Stephen Brown: And then you have the mileage.
[00:06:02] Rob Williams: –have a fixed by outta mountain sometimes you would not. But.
[00:06:06] Stephen Brown: And then you’ve got the mileage issues, too. When you think about a personal lease, you’re like, oh man, this is a great payment. I should do this. And they’re like, oh yeah, we’re giving you 8,000 miles a year. And you’re like, what? That’s three months worth of driving.
So, in commercial leasing vehicles, do they do the same thing? Can they tie it to a reasonable mileage, Wade?
[00:06:26] Wade Carpenter: Oh, yeah. A lot of times I see those, definitely. There’s usually a charge for every mile over. If you wait until the end it can, some commercial lease, they will charge by the mile, monthly or, on a regular basis, but most of them get hit at the end of it for a huge chunk of money.
[00:06:43] Stephen Brown: Okay. Well, I think I get what you’re saying, Wade. You’re saying, okay, you purchase a vehicle and it shows up as an asset. Plus you got the liability of the monthly payments.
[00:06:55] Wade Carpenter: Mm-hmm.
[00:06:55] Stephen Brown: Any payments you owe within 12 months is a current liability and anything over that is a long term liability. It’s depreciated, right, because it’s an asset? And that could have some good tax consequences. And leasing, you might have lower fixed cost.
There’s other things to consider, I guess. Do you think the fact that vehicles have gotten so expensive now makes a difference in that decision? It used to be you paid $15,000 for a Ford F-150 and now you’re paying 50. You know, maybe that shows how old I am. But I, I guess my point is, is to me, that’s a considerable asset.
[00:07:30] Wade Carpenter: Well, it is. And right now it’s a weird time with the supply chain issues. I’m seeing used vehicles going for as much as the new ones or even more because they can’t get them. It’s just stupid that people are selling vehicles for more than they paid for them.
[00:07:46] Stephen Brown: So are the leasing people making money hand over fist in this type of scenario that rarely ever happens?
[00:07:53] Wade Carpenter: Well, I don’t know about the leasing people, but I know there was a bunch of cars that were dumped back in the system during COVID and then now everybody can’t find the cars. So–
[00:08:04] Stephen Brown: Or the computer chips to make the cars.
[00:08:06] Wade Carpenter: Exactly. But you know, the question I guess becomes, when we’re kind of analyzing this for somebody, it’s partly cash flow. Is it lower cash flow? It’s also partly, is it gonna show up on my balance sheet as a liability and an asset that I’ve got to insure? Which you’d have to insure either way, but so, whether you think you’re gonna own that truck or, there are some things where we can expense, you know, a truck or something like that up front, and there are definitely different laws on, whether it’s a truck over 6,000 pounds, versus an SUV, versus a passenger car.
We can talk about the deductibility of that in a minute, but a lot of times the lease versus buy is a cash flow versus, what’s showing up on a balance sheet. And too often we see these where– we don’t see it as much with vehicle leases, but like heavy equipment where we had that, I think Rob mentioned the bargain purchase option. You could buy it out for a dollar, or, basically, huge portion of the useful life. It could be classified as a capital lease, even though it’s structured more as we’re making a monthly payment and then we figure out at the end, well, we’re gonna own it.
Capital Lease vs. Operating Lease
[00:09:17] Rob Williams: Now will you briefly define capital lease? That was a bit of jargon that probably went over a lot of our heads.
[00:09:23] Stephen Brown: Went over my head.
[00:09:25] Rob Williams: I remember that, but from my thing, but go ahead.
[00:09:28] Wade Carpenter: Well, there are basically five tests on a capital lease. Essentially a capital lease, from an accounting standpoint, means that you bought it. Whether it says that or not, you’re gonna pick it up on your balance sheet as an asset and a liability, even though it says I’ve just got a monthly lease at the end.
[00:09:44] Rob Williams: Which to me that is saying, it was a lease, but that was just financing for it. It might say it’s a lease on the piece of paper, but you bought it. And you financed it.
And that’s actually how I did some of mine. And there were some very attractive rates, but we just bought it, basically. We weren’t renting it. We owned it.
So, capital lease. That’s a great, I’m glad you said that, because that’s very confusing and enlightening for a lot of us. So they’re leasing their vehicles because the words lease there. But in our common wording that we use, you’re not renting it. You own it.
[00:10:20] Stephen Brown: All right. Again, what’s the difference between a capital lease and operating lease, Wade?
[00:10:24] Wade Carpenter: Well, essentially an operating lease is what you think of as a lease, where you’re exspensing it as you go. A lot of times people think that’s what they’re getting into. Whether the CPA does the due diligence, if they’re doing a formal financial statement, they should be looking at these leases and saying, do we report it in the notes as an obligation or on the balance sheet as an asset or liability?
[00:10:46] Rob Williams: I can tell you, I bet a lot of these people, they are probably– well, I don’t wanna generalize that. But back in the old days, we were pretty much recording it the same way. Did our CPA, or maybe our auditor for the thing, change that? But I know our bookkeeper and stuff was probably just putting it in in a certain way that was probably not correct.
[00:11:08] Wade Carpenter: A lot of times they just throw it in an auto expense and then we start looking at–
[00:11:11] Rob Williams: That’s exactly what we were
[00:11:12] Wade Carpenter: doing.
That’s the same payment we’ve seen for the last seven months? Is this actually a note or a lease?
[00:11:18] Rob Williams: Yeah.
[00:11:19] Wade Carpenter: So that’s the question that we run into all the time. There are some other differences between owning it. I think Rob, you brought up sales tax issues, and–
Sales tax considerations
[00:11:29] Rob Williams: Oh, yeah. Boy, the sales tax issue is to me, that was the, because I don’t know all the factors that Wade knows about it, but that was the biggie. And depending on which state we were in, too, because Tennessee is a lot higher than Mississippi was on that.
[00:11:45] Wade Carpenter: Well–
[00:11:45] Rob Williams: We lived in Tennessee and our business was in Mississippi. And then which one did we have to take it in? But let’s just talk about the tax. Not which state you live in, but.
[00:11:55] Wade Carpenter: Well, it is a relevant thing to talk about the tax. Because sales tax is a weird thing. And from state to state, they don’t have the same rules. But here in Georgia it’s the same thing. If you own that vehicle in a business name, whenever you go to get rid of it, when you sell it to somebody or whether you give to somebody– here in Georgia there’s some sales tax that needs to be paid on that.
And I can personally tell you, the state has chased people around for years and years after they’ve gotten rid of vehicle looking for that money. And whether they knew to collect sales tax and remit it to the state, a lot of times the contractor’s out of pocket, just because they’re on the hook for whatever they sold it for.
[00:12:34] Rob Williams: Well, and then that’s a great point. Because I was just thinking when you buy it from the dealer as a new vehicle, you gotta pay sales tax there as the purchaser. But that’s a great point. When you sell it, there’s probably a lot of people that didn’t pay the sales tax and maybe didn’t get caught either.
[00:12:49] Wade Carpenter: Well, usually if it’s in a business name, at least in Georgia, I know they will chase people down years later.
[00:12:57] Stephen Brown: So that’s another consideration of why you should lease instead of buying it, Wade?
[00:13:02] Wade Carpenter: Well, absolutely.
[00:13:03] Rob Williams: Before we leave there, I think to me the lease for us, it was how long you had it. Because you pay sales tax on the month– at least I was paying sales tax on that monthly lease amount. I was paying that. But then that’s only two years.
So that dollar amount was, let’s just say it’s $500 a month. So that’s $12,000. And you paid sales tax on that $12,000. But when we bought the vehicle new, say $60,000, you paid on that whole 60,000.
Dad used to get a new vehicle every year. So he leased it almost all the time because that sales tax. Although you can trade one in and do it, but he just kind of got addicted to the leasing. I don’t know if he even analyzed it every time to see if that was the–
[00:13:48] Stephen Brown: Well, I mean, who doesn’t like a new vehicle every year?
[00:13:51] Rob Williams: Yeah.
[00:13:52] Wade Carpenter: There’s another rabbit hole we can go down too there. So.
[00:13:55] Stephen Brown: Well, you’ve got the vehicle lease versus purchasing and you’ve got the depreciation issues. And the depreciation issues are what you’re allowed to depreciate that vehicle that you can take off your tax payment. To me that’s huge.
168(k) Bonus Depreciation
[00:14:08] Wade Carpenter: Yeah, that’s the 168(k) bonus depreciation and section 179, which is where expensing election.
[00:14:18] Stephen Brown: Well, isn’t that important?
[00:14:20] Wade Carpenter: Absolutely. And I could spend the rest of the time just talking about that and more, so.
[00:14:26] Stephen Brown: What’s the best thing you see going on right now?
[00:14:29] Wade Carpenter: If we’re gonna go down that road, that’s why I brought up a while ago, the IRS puts vehicles in essentially three different categories. If it’s a truck over 6,000 pounds, SUV over 6,000 pounds, or a passenger car. And it has a bearing on what we can do with these expensing elections.
And let’s just take the 168(k) that you’re talking about, what they refer to as the bonus depreciation. Right now we’re in July 22. It’s been in there for a little while, in the tax law. After the Tax Cuts and Jobs Act, they bumped that up to a hundred percent federal depreciation. But there are limitations on vehicles. But what I would say is that only goes through december 31, ’22. So if you look at the law, some of the things of the tax cuts and jobs act expire after, the end of ’23, ’24 with the election cycle. But bonus right now is scheduled to go away after the end of this year. Right now–
[00:15:27] Stephen Brown: –need to go purchase vehicles now? Between now–
[00:15:31] Wade Carpenter: Not necessarily. But 168(k) is the one that we should probably talk about first because it is mandatory unless you elect out of it and you have to take it whether put it on your return or not, unless you elect out of it. So that’s relevant because most states have not recognized it as deductible in that state.
So here in Georgia, we do not recognize it. And I believe Tennessee doesn’t either at the state level. Most states don’t. A lot of CPAs may disagree with me, but our standard practice in our firm is to elect out of it first because usually, we have the choice of the 179, which is the other code section where we can expense stuff up front.
I hate to get too deep into the weeds on this, but on a truck over 6,000 pounds, which, you know, the standard pick up truck that the contractors are riding around in. 168(k), you could expense that up front. All one hundred percent, right now. With an SUV there’s limitations. And depending on–
[00:16:38] Stephen Brown: How much of a work vehicle it is?
[00:16:40] Wade Carpenter: Well, you have that limitation too. But on a passenger car you have other limitations to where it’s a little more with an SUV, a little less with a passenger car. And I guess I’m gonna leave it at that right now.
[00:16:55] Stephen Brown: All right, that’s fine.
Percentage of business use
[00:16:57] Wade Carpenter: But going back to what you said, we’re just talking about the 168(k) as well as any of the rest of the deductibility of it. You’ve got the business use of the vehicle. if you drive it 20% for personal use, you only have 80% of it you can claim for business use.
If we’re talking about dispensing up front, we can only claim 80% of that vehicle based on the business use of it. And how do we figure the business use? Well, you have to track mileage. And the IRS would come back and impute some personal use unless you can provide that and you should have a written policy about how, especially if you’re giving them to employees.
[00:17:41] Stephen Brown: Okay.
[00:17:42] Wade Carpenter: They can use that.
Commuting and your tax home
[00:17:43] Stephen Brown: But commuting to and from the job site is considered commuting, that’s not personal use?
[00:17:49] Wade Carpenter: To and from a job site is usually deductible. Yes. That is not–
[00:17:54] Stephen Brown: Or to and from the office as the case may be.
[00:17:56] Wade Carpenter: To and from the office is typically commuting. It depends on where you, the IRS considers what you would say as your tax home. If you regularly do business at your house most of the time, it could be from your actual home where you live. But if say, the office gives you a desk to work at and that is where you’re supposed to be working, that could be claimed as your tax home. And you can only have one tax home.
Have a written policy regarding personal use of company vehicles
[00:18:23] Stephen Brown: Well, a lot of my customers have company vehicles and the rule is no personal use. You can take it home, but if you’re gonna go fishing, don’t be using our truck to tow your fishing boat.
[00:18:38] Rob Williams: Yeah, I don’t think that’s a tax situation though. That’s more liability concerns. When we were talking about when and where they were gonna use it, that was–
[00:18:46] Stephen Brown: Okay. I just–
[00:18:47] Rob Williams: Liability versus financing, when we’re looking at these are kind of two different topics in my mind.
[00:18:53] Wade Carpenter: Well, you should have some kind of policy there from a tax standpoint, as well as liability standpoint. You’re supposed to have some kind of written policy when you’re deducting these vehicles from, and there’s a question on your tax return asking those.
[00:19:05] Stephen Brown: Yeah, it’s just not a big deal to do it. You know, Just have the policy. It’s not a big deal.
[00:19:11] Rob Williams: The 179 though, that’s just a longer flatter depreciation spread out over a certain number of years? Is that right?
[00:19:18] Wade Carpenter: So you have 1 79, which is where we can expense it up front.
[00:19:22] Rob Williams: Oh, it’s upfront. Okay.
[00:19:23] Wade Carpenter: Yes. And then we have the traditional
[00:19:26] Rob Williams: The tradition.
[00:19:27] Wade Carpenter: M-A-C-R-S. The traditional accelerated depreciation that we can do on a–
[00:19:31] Rob Williams: Yeah. I think that’s one thing we talk about a lot in Profit First is some depreciation, because I know we had that for a large building. We were gonna do a high-rise building in our personal family business and we were gonna accelerate that depreciation and it was looking good at the first few years is what we were looking at.
But then I started looking at it and I said, well, after these first years– because we weren’t gonna basically owe any taxes on that profit that was coming in here. And I said, but look guys, this is setting us up for a nightmare after that depreciation. I can’t remember how many years it was, but it, the other ones were gonna have a really large tax bill and our cash flow is not gonna be there. Do we really even want to take that accelerated depreciation? Everybody’s always yeah, let’s deduct everything, but if you’re not saving that money, it can set yourself up for some rough years down the road.
So sometimes I don’t like the accelerated everybody, you know, what could possibly be bad about that? Well, your cash flow. Because you’re gonna owe more taxes in those later years, because you’re not gonna have that deduction anymore.
[00:20:42] Wade Carpenter: Yeah, well, so I know real estate in 179 is, there’s some special rules on that. And I’m trying to stick with the vehicles.
[00:20:50] Rob Williams: Yeah. Yeah. Oh, okay. Well, let’s compare it to a vehicle. If we take it all up front, then we’re not gonna have those deductions later. We’re gonna owe more taxes in the later years.
Depreciation recapture and when depreciation comes back to bite you
[00:20:59] Wade Carpenter: Exactly. But that also brings up the question of, well, you just said something about your father getting a new vehicle every year. And that’s this precise thing. I have some lawyers that they all think that they’re gaming the system and they need a new vehicle every year, and we’re gonna write it off, but there’s something called depreciation recapture.
I don’t know if we got really a lot of time to go into that. Maybe we could go do another episode on this at some point, but that is precisely, maybe this will be our teaser for the next episode. Why you can’t go buying– or so the short answer is yes, you can, but it’s gonna come back to bite you.
And the huge majority of people do not understand how it comes back to bite you when you’re expensing it up front, whether it’s 168(k) bonus depreciation or the 179 expensing election. And there are different rules on how much we can do with the expensing election on a passenger car versus a SUV versus pickup truck– or a pick ‘truck, I should say.
[00:22:06] Stephen Brown: Yeah.
Versus a dump truck or a–
[00:22:08] Wade Carpenter: True. Yes. There are definitely–
[00:22:11] Stephen Brown: Every contractor’s got some big Mac trucks that pull equipment around, even the ones that use other companies to move their equipment, have some degree of big vehicles. And then you’ve got dump trucks.
Wrapping it up, what should our listeners know about tax deductibility of vehicles?
[00:22:29] Wade Carpenter: We haven’t hit everything today. We were just basically talking about lease versus buy. We only touched on the bonus depreciation. We didn’t talk about the other two main ways of depreciating it.
But you should know that there are ways that you can get bitten by doing the wrong thing. And they’ve actually changed some of the tax laws where most people you could get upside down on a vehicle and you could roll it into the next one. Well, that can bite you as well.
There’s a lot of questions that, perhaps we can talk about later. Everybody thinks, well, if I put my name on the vehicle or I wrap my vehicle with advertising, that makes it automatically deductible,
[00:23:06] Stephen Brown: There we go.
[00:23:06] Wade Carpenter: Not true. That’s you know, we need to talk about that. Yeah.
[00:23:10] Rob Williams: I know, and I’ve always heard that too.
[00:23:13] Wade Carpenter: So again, we didn’t get to a fraction of the questions that we were gonna talk about, but I know we’re outta time.
[00:23:19] Stephen Brown: And if I wrap my company vehicle in Mossy Oak I guess that’s bad too. Huh?
[00:23:25] Wade Carpenter: I don’t know about that, but.
[00:23:27] Stephen Brown: I don’t know either. It’s just a shame. There’s just so much to keep up with and so much you have to deal with, but it’s a fact of life. And these questions, wow. Call your CPA.
[00:23:38] Wade Carpenter: We only scratched the surface of it. So I wanna say again, do not try to do anything based on what we said today. I hope it has given you some knowledge or things to think about, to go talk to your own CPA. And if you don’t have somebody you can talk to, well, come talk to me and–
[00:23:54] Stephen Brown: There you go.
[00:23:54] Wade Carpenter: Love to talk to you about working together.
[00:23:56] Stephen Brown: Yeah, don’t talk to me.
[00:23:58] Wade Carpenter: Shameless plug there. Right, Rob?
[00:24:00] Stephen Brown: All right.
[00:24:01] Rob Williams: All Right.
[00:24:01] Stephen Brown: Thank you, Wade.
[00:24:03] Rob Williams: Yeah. And where can we find them? We can find it at ContractorSuccessForum.Com. It has all of our information on there. So reach out to us on there and reach out to us on our LinkedIn Contractor Success Forum discussion page. Maybe ask some questions on there. So thanks a lot for listening to the Contractor Success Forum and our myriad of questions about tax deductibility and leasing and buying vehicles.
Thanks a lot. And we’ll see you on the follow-up episode.