Car Concerns: Buy or Lease?

Buying or leasing? What's better for your next car? This is a question physicians ask their tax advisors all the time. Ironically, one of the most important factors to consider is not even tax related.

The first question you need to ask yourself is how long you generally keep your cars? If you prefer to get a new car every three or four years, take a look at leasing your vehicles. If you're frugal like me, and hope to keep your car for at least seven or eight years, then buying probably makes the most sense for you.

Mileage BreakdownWhether you own or lease your vehicle, you can only claim a tax deduction based on the percentage of the miles driven during the year that are business miles, including:

Deductible Miles:• Driving between job sites

• Driving between your home and a temporary job site where you'll be working for less than one year

• Driving to meetings, conferences, interviews, and CME seminars

Non-Deductible Miles:• Commuting between your home and a regular place of business

• Commuting between your home and a hospital or emergency room while on call

• All other personal miles driven

Calculating the Deduction

From a tax perspective, you can claim your automobile deduction based on either the standard mileage rates or on actual expenses incurred. The standard mileage rate for 2008 is 50.5 cents per business mile driven, and is the same whether you own or lease your car.

If you drive relatively few miles during the year, with most of those being business miles, you're generally better off basing your deduction on the actual miles driven. To calculate your deduction this way, make sure to include the amount you spend on gas, insurance, repairs, and parking at home. These expenses are generally similar whether you own or lease your vehicle.

Don't forget to also include in your calculations the lease payments if you lease a car or a factor for depreciation if you own the car. One drawback to owning is that the IRS limits the depreciation you can claim based on a car costing no more than $14,800. For this reason, people who lease generally get a larger tax break when basing their deduction on actual expenses incurred.

Other Considerations

Here are some other factors to consider when deciding whether to lease or buy your next car:

• Leasing generally provides you with the opportunity to get a more expensive vehicle for less money down and a smaller monthly payment.

• If you're acquiring a car through your business, leasing does a better job of matching the cash flows of providing a company car with the deductions you're allowed to claim.

On the other hand:

• If you plan to get a hybrid vehicle, you only qualify for the tax credit if you purchase the vehicle. When you lease a hybrid, the leasing company is the one who gets the tax credit.

• Most lease contracts limit you to just 12,000 miles (or less) per year. If you drive more than the maximum miles allowed under your lease, expect to be penalized at the end of the lease term for each additional mile driven.

Which Way to Turn?Since the auto industry is so competitive, the deals they offer for buying versus leasing tend to be quite equivalent. And thanks to the internet, you now have plenty of information available, as well as access to a variety of tools, to help you find the best deals. So is it better to lease or to buy your next vehicle? It depends.

Andrew D. Schwartz, CPA is the founder of The MDTAXES Network, a national network of CPAs who specialize in providing tax services to healthcare professionals. A frequently-quoted tax advisor, his firm of has over 45 years of combined experience specializing in the tax issues affecting health care professionals. For more information call 800-471-0045 or e-mail, cpa@mdtaxes.com.