Tax Advantages of Leasing versus Buying
When it comes to buying or leasing a Toyota, there are many factors that must be weighed to ensure you make the best financial decision for you and/or your business. This means carefully considering any cost differences, like how your new vehicle will be taxed.
So, are there any advantages to leasing or buying when it comes to taxes? This topic can get a little dense, but we’re here to help you find the answers you’re looking for at Fiore Toyota.
Note that each state has different tax laws and rates, so be sure to check which applies to your location. We used Pennsylvania’s tax laws and rates for the following information.
According to the Pennsylvania Department of Revenue in 2019:
- State sales tax is at 6%
- Local sales tax is at 1% in Allegheny and 2% in Philadelphia
- City sales tax is at 2% in Philadelphia
- Motor Vehicle Lease tax is at 3%
Taxes When Buying
<How do taxes apply when buying a vehicle?
You will be paying 6% sales tax (plus any local or city sales tax that applies to you) on the entire purchase price of the vehicle.
<What if you trade-in a vehicle when buying?
In Pennsylvania, if you trade-in a vehicle, then you’ll only pay tax on the difference between your trade-in value and the new car. For example, if you trade in a car worth $10,000 and you’re buying a car worth $30,000, then you will only pay taxes on the $20,000 difference, which would be $1,200 in taxes.
Taxes When Leasing
<How do taxes apply when leasing a vehicle?
For a leased vehicle, you will have to pay Pennsylvania’s 3% motor vehicle lease tax in addition to the state’s 6% sales tax (plus any local or city tax) on the lease price.
So, if your location’s sales tax is 6% plus the 3% lease tax, then the total tax on your lease will be 9%, which would be applied to your monthly payment.
Let’s do an example:
You have a 3 year lease on a car with an MSRP of $20,000 and a 50% residual.
The lease would be (the MSRP - the Residual), or ($20,000 - $10,000), which is $10,000.
It spans 3 years, or 36 months, so ($10,000 / 36) gives you a monthly payment of $277.78.
That monthly payment would be taxed at 9%, ($277.78 x 0.09) = $25 per month.
So, over the course of your lease you will pay (36 months x $25) = $900 in taxes
Tax Benefits for Business Vehicles
Whether you buy or lease your company vehicle(s), you may deduct the entire cost of operation used for business from your taxes. You can use the standard mileage rate method or the actual expense method, which is explained in detail on the IRS webpage. If you qualify for both, you should do the math and see which one gives you a larger deduction.
Car leasing payments are tax-deductible.
Only the interest on a car loan is deductible as a business expense.
Both lease and owned vehicles may be eligible for depreciation.
Again, do the math and see what would make more sense considering the other factors that go into the decision like amount of driving, potential wear-and-tear, etc.
As for personal vehicles, you may not deduct any costs from your taxes. Although, you may claim sales tax from your personal vehicle if meet these 2 criteria:
- You itemize your deductions
- Your sales tax deductions (including the sales tax on your car) exceed your state income
What’s the Verdict?
In short, taxes are just one factor to consider when deciding whether to buy or lease. The advantage really depends on the terms of your lease or purchase, your state’s tax laws and rates, and the kind of usage you want out of your vehicle. Make sure you do the math and/or consult with a tax professional to make sure you sufficiently weigh your options.