Transcript Slide 1

Leasing vs. Purchasing
a Luxury Vehicle
Economic & Tax Impact
of Auto Acquisitions
Mercedes Benz of Long Beach
Monday, June 19, 2006
Presented by:
Blake E. Christian, CPA, MBT
Prior to joining the firm, Blake was a tax partner with the international accounting firm of KPMG Peat Marwick and
also served as Tax Director with a Fortune 500 corporation. Blake received a master's degree in taxation from the University
of Southern California and completed a bachelor's degree in business administration from California State University Long
Beach.
Blake’s clients include multi-national, publicly traded corporations, as well as closely held, owner-managed
businesses. His industry concentration includes manufacturing and distribution, service companies, shipping and
transportation, and healthcare. In addition to corporate, partnership and individual tax compliance and planning, Blake
specializes in California and federal tax incentive programs - with concentration on the California Enterprise Zone credit
program. In the last two years alone, HCVT has identified over $20,000,000 of EZ credits for their clients.
Blake has lectured at a number of universities, including University of Southern California (MBT Program) and
California State University Long Beach (Annual Tax Conference). Blake has also been a technical resource for a number of
news organizations, including USA Today, Los Angeles Times, KTLA News, Orange County NewsChannel, KNX
NewsRadio, and KFI Radio.
Blake is a member of the Tax Division of the American Institute of Certified Public Accountants, the California
Society of Certified Public Accountants, the Tax Section of the State Bar of California and a member of the Long Beach
Estate and Trust Council. Blake is a member of Long Beach Rotary, the Los Angeles Harbor Association and the Long
Beach Chamber of Commerce Board Member/Leadership Council Member. He has also been a charter member and ViceChairman of the (post-bankruptcy) Orange County Treasury Oversight Committee since 1995 and The Boeing C-17 “Red
Team.”
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LEASE VS. BUY?
Assumptions:
2007 MBZ SL 550 Sport
Purchase Price
$
Sales Tax
Capitalized Cost
$
110,000
9,075
119,075
Business Use %
Effective Tax Rate
75%
41.05%
LEASE TERMS:
24 Months
Amounts below have not been present valued for time value of money
Lease Period
36 Months
48 Months
60 Months
Cost @ Lease Signing
$
3,900
$
3,799
$
3,672
$
3,500
Monthly Lease Payments (With Sales Tax)
$
2,050
$
1,954
$
1,827
$
1,800
Imputed Lease Interest Rate
Residual Value Percentage @ Lease Termination
PURCHASE TERMS:
6.87%
7.78%
8.24%
9.38%
72%
60%
51%
42%
Measurement Period
36 Months
48 Months
60 Months
24 Months
Down Payment
Modified Monthly Loan Payments (84-Month Loan)
Actual Monthly Loan Payments With Down Payment = Lease Signing
$
14,145
$
13,087
$
2,638
$
-
[B] $
1,549
$
1,565
$
1,719
$
1,646
$
1,701
$
1,702
$
1,704
$
1,706
Effective Loan Interest Rate
CUMULATIVE NET COST/(BENEFIT) OF LEASING VS. PURCHASING:
6.27%
6.36%
6.41%
6.20%
24 Months
36 Months
48 Months
60 Months
Pre-Tax Lease Cost > Purchase
$
1,773
$
4,720
$
6,210
$
12,742
After-Tax Lease Cost < Purchase
$
(7,936)
$
(8,575)
$
(9,517)
$
(6,892)
SUMMARY OF MONTHLY PAYMENTS W/ TAX BENEFITS:
24 Months
36 Months
48 Months
60 Months
Monthly Lease - Monthly Costs After-Tax Benefits
[A] $
1,548 76%
$
1,448 74%
$
1,345 74%
$
1,318 73%
Monthly Purchase - Monthly Costs After-Tax Benefits
[A] $
1,879 121%
$
1,687 108%
$
1,543 90%
$
1,433 87%
[A] Applicable during lease measurement period. Ignores impact of costs due at lease signing, down payments and residual buy-outs.
[B] Represents a modified loan amortization so that lease residual and unamortized loan amounts are equal at the end of lease term.
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LEASE TERMS
Assumptions:
Purchase Price
Sales Tax
Capitalized Cost
$
$
110,000
9,075
119,075
Business Use %
Effective Tax Rate
75%
41.05%
Amounts below have not been present valued for time value of money
24 Months
36 Months
48 Months
60 Months
Monthly Lease Payments
$
2,050
$
1,954
$
1,827
$
1,800
Cost @ Lease Signing
Total Lease Payments
$
3,900
49,200
$
3,799
70,344
$
3,672
87,696
$
3,500
108,000
Cash Outflow (Pre-Tax)
Cumulative Tax Benefits
$
53,100
(15,940)
$
74,143
(22,003)
$
91,368
(26,808)
Cash Outflow (After-Tax)
Residual Value - Buy-Out
$
37,160
79,200
$
52,140
66,000
$
64,560
56,100
Cash Outlay After Buy-Out (After-Tax)
$ 116,360
Effective Interest Rate
6.87%
$ 118,140
7.78%
$ 120,660
8.24%
$ 111,500
(32,430)
$
79,070
46,200
$ 125,270
9.38%
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PURCHASE TERMS
Assumptions:
Purchase Price
Sales Tax
Capitalized Cost
$
$
Business Use %
Effective Tax Rate
110,000
9,075
119,075
75%
41.05%
Amounts below have not been present valued for time value of money
24 Months
36 Months
48 Months
60 Months
Monthly Loan Payments
$
1,549
$
1,565
$
1,719
$
1,646
Down Payment
Total Loan Payments
$
14,145
37,182
$
13,087
56,336
$
2,638
82,520
$
98,758
Cash Outflow (Pre-Tax)
Cumulative Tax Benefits
$
51,327
(6,231)
$
69,423
(8,707)
$
85,158
(11,081)
$
98,758
(12,797)
Cash Outflow (After-Tax)
Balance of Payment on Loan
$
45,097
79,200
$
60,715
66,000
$
74,077
56,100
$
85,961
46,200
Cash Outlay After Measurement
Period (After-Tax)
Effective Interest Rate
$ 124,296
6.27%
$ 126,716
6.36%
$ 130,177
6.41%
$ 132,161
6.20%
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DEPRECIATION/LEASE INCLUSION TABLES
FOR LUXURY AUTOS
Depreciation Table
Period
Current Year
Depreciation
Expense
Lease Inclusion Table
(FMV of $100,001 - $110,000)
Accumulated
Depreciation
Year 0
Current Year
Depreciation
Expense
Cost Basis
Period
119,075
Year 0
-
Year 1
3,260
3,260
115,815
Year 1
413
Year 2
5,200
8,460
110,615
Year 2
908
Year 3
3,150
11,610
107,465
Year 3
1,347
Year 4
1,875
13,485
105,590
Year 4
1,616
Year 5
1,875
15,360
103,715
Year 5
1,867
Year 6
1,875
17,235
101,840
Year 6
1,867
Year 7
1,875
19,110
99,965
Year 8
1,875
20,985
98,090
Year 9
1,875
22,860
96,215
Year 10
1,875
24,735
94,340
Years 11-20
18,750
43,485
75,590
Years 21-30
18,750
62,235
56,840
Years 31-40
18,750
80,985
38,090
Years 41-50
18,750
99,735
19,340
Years 51-60
18,750
118,485
590
590
119,075
Year 61
-
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6,000 LBS. EXCEPTION
Vehicle Model
Gross
Weight (lbs)
Gross
Weight (lbs)
MSRP
Dodge (Continued)
BMW
X5
Vehicle Model
MSRP
6,005
$53,845
Cadillac
Sprinter
8,550
$32,391
Ram 1500
6,650
$26,930
Escalade
7,000
$54,280
Ram 2500
11,000
$29,160
Escalade ESV
7,200
$56,160
Ram 3500
11,000
$32,610
Escalade SRX
7,000
$43,940
Ford
Econoline E350 Van
9,500
$24,460
Chevrolet
Astro Passenger Van
6,100
$27,620
Econoline E350 Pass. Wagon
8,700
$27,590
Avalanche 1500
7,000
$36,062
Excursion
8,900
$43,650
Avalanche 2500
8,600
$36,545
Expedition
6,650
$37,185
Express Pass. Van 3500
9,600
$30,525
F150 Styleside
6,500
$28,345
Silverado 1500
6,400
$28,600
F250 Super Duty
9,900
$28,950
Silverado 2500
8,600
$31,999
F350 Super Duty
11,200
$30,110
Silverado 3500
11,400
$34,200
GMC
Suburban 1500
7,200
$41,907
Safari AWD Pass. Van
6,100
$27,620
Suburban 2500
8,600
$41,280
Savana Pass. Van 3500
9,600
$30,525
Trailblazer
6,400
$32,470
Sierra 1500
6,400
$31,170
Tahoe
6,800
$38,530
Sierra 2500
8,600
$32,161
Sierra 3500
11,400
$33,270
Dodge
Durango
6,400
$33,280
Sierra Denali
7,200
$44,255
Ram Cargo Van 3500
8,700
$22,150
Yukon Denali
7,200
$44,695
Ram MaxiVan 3500
8,700
$22,010
Hummer
H1
10,300
$111,845
H2
8,600
$50,590
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6,000 LBS. EXCEPTION (CONTINUED)
Vehicle Model
Gross
Weight (lbs)
Vehicle Model
MSRP
MSRP
Isuzu
Lincoln
Aviator
6,210
$43,387
Ascender
Navigator
7,450
$51,960
Land Rover
Blackwood
6,780
$52,500
Mercedes
G-Class
Gross
Weight (lbs)
6,834
$81,675
GL-Class
N/A
$55,675
ML-Class
6,239
$40,525
Pathfinder Armada
6,800
$37,600
Titan
6,486
$28,950
6,790
$73,165
Land Cruiser
6,860
$53,915
Sequoia
6,600
$38,080
Tundra
6,200
$23,835
6,200
$38,415
6,400
$34,197
Discovery
6,064
$37,995
Range Rover
6,724
$71,865
GX470
6,000
$45,700
LX470
6,860
$64,800
Lexus
Nissan
Porsche
Cayenne
Toyota
Volkswagen
Touarag
Other Vehicles to Note
- Rolls-Royce
- Bentley
- Maybach
8
TAX IMPLICATIONS OF BUY V. LEASE
Purchase
Lease
Can I take a tax deduction?
Only on the portion used for business
(personal use is a non-deductible expenditure).
Only on the portion used for business
(personal use is a non-deductible expenditure).
How is the tax deduction
determined?
The original cost of the vehicle is depreciated over a number of
years, which depends on the price and weight of the vehicle.
The lease payments are deductible in the year payments are
actually made.
Are there limitations to the
amount of the tax
deduction?
If the vehicle is 6,000 lbs or less, the luxury auto limitations
restrict the amount of the depreciation deduction taken in a given
year and lengthens the time in which the benefits of a tax deduction
is realized, depending on the purchase price of the vehicle.
The auto lease inclusion is netted against the amount of the lease
payment deductions (#2 above). Since the lease payment includes
sales tax, depreciation and other costs, the tax deductible amount
under a lease is typically higher than a purchase.
On what types of vehicles
do the above limitations
apply?
Vehicles with a “gross vehicle weight” of 6,000 lbs. or less.
Sample vehicles that would not be subject to the limitations range
include the Ford Expedition, the Dodge Durango and Hummer H2.
Vehicles with a “gross vehicle weight” of 6,000 lbs. or less.
Sample vehicles that would not be subject to the limitations range
include the Ford Expedition, the Dodge Durango and Hummer
H2.
At what fair market value
(FMV) of the vehicle do
the limitations begin to
apply?
For 2005, FMV approximately in excess of $14,800 for passenger
autos; FMV in excess of $16,300 for trucks and vans; FMV in
excess of $44,400 for electric vehicles.
For 2005, FMV approximately in excess of $15,200 for passenger
autos; FMV in excess of $16,700 for trucks and vans; FMV in
excess of $45,000 for electric vehicles.
Is the interest expense
deductible?
The interest expense incurred on the financing of the vehicle is
deductible not subject to limitations, to the extent that the vehicle is
used for business.
With leases, the term for interest is called “money factor”. The
“money factor” is built-in to the lease payments and therefore,
there is an indirect minor limitation via the “auto lease inclusion”
rules.
Can I take a Section 179
deduction in the year of
acquisition?
For vehicles 6,000 lbs. or less, due to the “luxury auto limitations”,
a Section 179 expense is not allowed. For vehicles over 6,000 lbs.
up to 14,000 lbs., the maximum Section 179 deductions for 2005 is
$25,000 for both federal and California. For vehicles over 14,000
lbs., the maximum Section 179 deductions for 2005 are $105,000
and $25,000 for federal and California respectively.
Section 179 deductions are not allowed for a true lease.
Note: All of the above rules only apply on the business-use portion of the vehicle.
9
EMPLOYEE BUSINESS EXPENSES
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CONCLUSION
CONSIDER PURCHASING IF:
 You are acquiring a vehicle weighing more than 6,000
lbs.
 You are acquiring a vehicle under $30,000.
 You use the vehicle for less than 25% business use.
 You have plenty of cash or have easy access to lowinterest loans.
 You are inclined to keep your vehicle for 5 years or
more, or average more than 15,000 miles per year.
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CONCLUSION (CONTINUED)
CONSIDER LEASING IF:
 You prefer luxury vehicle.
 You tend to want a new vehicle every 3-4 years.
 You want to minimize monthly payments.
 You use the vehicle for business and want to maximize
deductions (NOTE: Consider front-loading tax
deductions by increasing down payment on a lease).
 You don’t like the hassle of selling your old car.
 You are purchasing a “unibody” car.
12
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