When Should Lyft and Uber Drivers Lease Cars?
After a careful review of IRS Publication 463, I have noticed that there are some situations when leasing a car can be better than owning a car for driving full time on rideshare services like Lyft, Uber, and Sidecar.
The below post assumes the driver is driving 100% of the time for business reasons.
Deductions based on Depreciation:
When you buy a new car for Uber, for example, you can’t claim the loan payments as a deduction as a car’s useful life is much longer than the loan repayment period. You would need to calculate the depreciation on the car. According to the IRS rules, you can only deduct so much every year from your taxes, even if you use the car 100% of the time for your business. If you use between 50-100%, you will calculate the maximum possible deduction and multiply that by the percentage of the time you drive it.
Here is the maximum depreciation deduction for cars (Trucks and Vans less than GVWR of 6000 lb is similar amounts)
| Date Placed in Service | 1st Year | 2nd Year | 3rd Year | 4th and Later Years |
| 2012-2013 | $ 11,160.00 | $ 5,100.00 | $ 3,050.00 | $ 1,875.00 |
The above chart is a gross over simplification of depreciation and the $11k figure in the first year assumes the tax payer has applied for a special depreciation allowance. You would actually deduct 5-15% off of the above figures and get your real deduction. The special depreciation allowance applies only for the first year the qualifying car is placed in service. To qualify for the allowance more than 50% of the use of the car must be in a qualified business use. A qualified business use is any use in your trade or business. It does not include use for the production of income (investment use). However, you do combine your business and investment use to compute your depreciation deduction for the tax year. To be a qualified car (including trucks and vans), the car must meet all of the following tests.
- You purchased the car new on or after January 1, 2008, but only if no binding written contract to acquire the car existed before January 1, 2008,
- You placed the car in service in your trade or business before January 1, 2014,
- You used the car more than 50% in a qualified business use.
When Buying is better than leasing:
Calculation on Buying a 2015 Corolla at $20,000.
- Adding up all the maximum deductions, you can deduct over $21,000 over four years, which is more than the cost of the car!
- Gas is a separate deduction so essentially you can deduct the entire cost of the car.
Calculation on Buying a 2015 Mercedes S-Class at $100,000
- Maximum deduction is $21,000 during the first four years, but actual depreciation is estimated at $55000 (resell value of 2011 S550 is $45k)
Conclusion:
- It is better to purchase the 2015 Corolla than buy the Mercedes S550 (Yes I know, obvious right?)
- The cheaper the car is, the better it is to buy and depreciate, rather than lease.
Deductions Based on Lease Payments
You can deduct your lease payments of the vehicle you use for business purposes. Assuming 100% business use, you can deduct almost the entire lease payment.
Calculation on Leasing a 2015 Corolla at $20,000 value
- Lease costs $2800 upfront, $150 per month over 36 months – Total cost: $8200 (before any other sales taxes or other fees)
Calculation on Leasing a 2015 Mercedes S-Class at $100,000 value
- Lease costs $7000 upfront, $1350 per month over 36 months – Total cost: $55600 (before any other sales taxes and other fees)
Note:
- Lease upfront payments are tax deductible, but the amount is spread out over the life of the lease, so it will impact you slightly in the first year but will recoup it in the later years.
- You can’t deduct the gas guzzler tax for cars under 22mpg combined. It is only accessed on new cars (leased or purchase) and must be paid upfront. Luckily, the S550 has avoid the gas guzzler tax for a few years but avoidable for the large UberSUV qualifying SUVs.
Instead of having the depreciation limits for purchased luxury vehicles as seen in the first example, you can deducts the full business use percentage of your lease payments adjusted by a just a small “inclusion amount” added back to income.
Conclusion:
- It is much better to lease the S550 than the Corolla.
- Leasing becomes much more attractive to businesses when cars are very expensive, like luxury vehicles and SUVs (under GVWR of 6000 pounds)
- Make sure to factor in the interest hidden inside the lease payments. It can vary between 1% all the way up to 10%. Look up the money factor for your lease: http://www.leaseguide.com/lease07/
Vehicles with GVWR over 6000 pounds
Gross Vehicle Weight Rating (GVWR) is the manufacturer’s specified fully loaded vehicle weight. Special rules apply to vehicles with a GVWR of over 6000 pounds. There are no depreciation limits on purchased vehicles with a GVWR over 6,000 pounds. Combine this with a Section 179 deduction and $25,000 of the vehicle cost can be deducted annually.
Calculation on Buying a 2015 Corolla at $20,000.
- Adding up all the maximum deductions, you can deduct over $21,000 over four years., which is more than the cost of the car!
- Gas is a separate deduction so essentially you can deduct the entire cost of the car.
Calculation on Buying a 2015 Toyota Highlander LE at $30,000 (Seats 8), GVWR of 5600 lbs
- Adding up all the maximum deductions, you can deduct over $21,000 over four years.
Calculation on Buying a 2015 Toyota Sequoia LE at $30,000 (Seats 8), GVWR of 7100 lbs
- Adding up all the maximum deductions, you can deduct the close to the entire amount in the first year: $25000 + 50% of residual value of $5000 = $2500, Total deduction: $27500 in the first year)
| Date Placed in Service | 1st Year | 2nd Year | 3rd Year | 4th and Later Years |
| 2012-2013 | $ 25,000.00 + 50% of Residual | $ 5,100.00 | $ 3,050.00 | $ 1,875.00 |
Conclusion:
- There are huge tax advantages to buying (or financing) a new SUV or “truck” over a GVWR of 6000 pounds.
- Even though the Sequoia is the same cost as the Highlander, because of its higher weight, it is in a different tax category, so it gets a much larger tax deduction in its first year.
Additional Notes:
- You can use the large $25,000 deduction even on used trucks assuming the used vehicle costs over $25,000, but you won’t get the additional 50% deduction
- You must have the business income to support such a large deduction. Be careful with this as the IRS sees a lot of people trying to get large deductions for “lifestyle” choices rather than business use. Don’t buy a $70,000 Range Rover and expect to be able to deduct $50000 in your first year with only an income of $50,000 a year.
- It is possible to finance your vehicle and still take the large deduction. Consult this website for more information: http://www.section179.org/section_179_leases.html
Summary:
- Better to buy cheaper cars and depreciate it based on the guidelines above
- Better to lease expensive luxury cars and deduct the cost of the lease from your taxes
- Better to buy a new or used SUV or truck with a GVWR over 6000 pounds because of the large $25,000 deduction in the first year.
- Remember that when you deduct expenses (such as depreciation OR lease payments), you can also deduct the cost of gas as well.
This post only serves as an analysis to show various deductions side by side, rather than actual tax advice. Speak to your local certified tax professional before making any large purchases or changes to your business.
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