Paying taxes vs deduct lease payment

Taxes
#1

If you can lease any car and deduct it 100% from your taxes vs paying a lot of money at the end of the year in taxes, is it good or bad idea?

For example (like Jeremy does);

Juan have to pay in tax $8,000 at the end of the year, but in 2020 he got a lease paying $500 per month, as independent contractor he can deduct the 100% of the lease payments, at the end of 2020 he pay $2k in taxes and drive and enjoy a brand new car.

I would like to read your opinions of I’m right or not.

Thanks!

#2

Hey Gabriel!

So, I don’t believe you’re correct here. That’s not quite how “write offs” work. You don’t get to subtract the write off from what you OWE, you subtract it from the amount you’re TAXED ON. So let’s walk through two scenarios.

Scenario 1: Julie doesn’t lease a car.

  • Julie’s taxable income is $40,000 and her tax rate is 20%.
  • Julie’s tax owed is $40,000 x 20% = $8,000.
  • Julie’s after tax income is $40,000 - $8,000 = $32,000

Scenario 2: Juan leases a car.

  • Juan’s income is $40,000 and his tax rate is 20%.
  • Juan leases a car for $6,000/year to use as a write-off to limit is tax liability
  • Juan’s taxable income is now $40,000 - $6,000 = $32,000 (he’s not taxed on his expense of leasing a car… that’s what a tax write-off is)
  • Juan’s tax owed is $32,000 x 20% = $6,400.
  • Juan’s after tax, after car cash is: $40,000 - $6,400 (tax) - $6,000 (still gotta pay for the car) = $27,600

So you can see after leasing the car Juan is left with $27,600 in cash compared to Julie’s $32,000. He of course got to drive a leased car for that year, but it certainly wasn’t a FREE car. He just got a discount on his taxes of $1,600 (the difference between $8,000 Julie paid and $6,400 he paid in taxes).

To think of it another way, it’s basically like getting a 20% of deal on his car because he won’t be paying taxes on the cost of the car. But driving a cheaper car would certainly leave him with more money… he still has to pay the 80%!

#3

Hey! There are also extra costs and limitations of a lease…

You have to put around 3K down from the ads I see
Max milage with heavy fees per mile when you go over
I believe you need to go via the dealer for regular maintenance and I am not sure if that is on your $$ or the company
it isn’t your car - if you buy a car - even though it depreciates…you can always sell it and get some $$ back
After the year or two, you still need a vehicle and need to pay for it in some fashion

pro of a lease: some people like to have new cars every couple of years - that is ok and if you are that person, you would prob be better with a lease if you can afford it.

Best,
Katie
@chronicallyillfinanciallyfit