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      02-26-2013, 10:10 PM   #12
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Drives: BMW 335i - Coupe
Join Date: Jun 2009
Location: Washington, DC

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Originally Posted by smohr33 View Post
It really only makes sense if you are a business owner. Eventhough the lease payments balloon due to the milage, you can still write the lease off if its for business use.

If it's a personal car, it makes absolutley no sense. Especially since these cars only have 50k mile warrantys. Once your 50k mile warranty is up, you are still required to maintain the vehichle and return it in proper working order, which could cost a lot out of pocket if something goes wrong.
Yes, I would, to a point, have to agree, provided the lease qualifies as an operating lease, but even so, operating leases are subject to deductible limits -- I believe they are called inclusion limits -- with regard to the prices of cars that are leased. (You can't deduct the payments for a purchased car, which is what a car qualifying for capital lease treatment would be deemed. You can potentially, depending on your circumstances, depreciate it or take one of several lump sum elections.)

I'm fairly certain all BMWs exceed those limits, making their deductibility less than 100% of the lease payment amount, but maybe not (it's been nearly 25 years since I actually did a corporate/business tax return). Too, I believe the classification "operating lease" is about to go the way of the dodo bird, so when that happens, the only option will be to capitalize and depreciate; the P&L approach of an operating lease won't exist.

Given the preceding, it seems quite hard to make the lease of a BMW of any sort a financially sound thing to do for US companies, although if one drives a lot of miles in a year, there is some hope of getting a small deduction, albeit not the full amount paid for the lease. If one doesn't drive a lot (more really than even the OP does each year), leasing a BMW for business in the US is just spending money with the hope that having the nicer car will yield some intangible/immeasurable return that offsets the loss of the deduction.

The OP should verify the following, but as far as I recall, here's how it works:

IRS promulgates an inclusion amount that you then multiply by the number of days the lease was active during the current tax year. The product is the inclusion amount, or in other words, it's the sum by which you must reduce your deduction for the expenses pertaining to that car.

For example, if the OP leases a $40K 3er for 3/4ths of a year and the "inclusion number" is 25 for year one of the lease, the amount of the deduction for the leased car's costs must be reduced by (25(.75 x 365) = 6844, with $6844 being the "inclusion amount." With each passing year, the inclusion amount gets larger. I believe the inclusion numbers for year two are roughly double those of year one, and then they increase by about 20% with each subsequent year. So, if the lease payment is $400/month, and maintenance is covered by BMW, there's basically no deduction.

The preceding assumes one uses the actual cost method. If you use the mileage method and drive enough miles in a year, you will get some deduction: 2013 mileage rate = $0.565, so with 15K miles (3/4ths of 20K miles since one'd have only had the car for 3/4ths of the year) you can deduct about $1600 in year one.

(Note: my numbers are "order of magnitude" numbers, that I judgmentally estimated to be the numbers the IRS is using right now. I know they aren't exactly right, but they are close enough to be accurately illustrative.)

Basically, the IRS doesn't want to provide a tax "perq" for folks who lease/rent luxury cars. But at the same time, the IRS will concur that if you have a need to lease a fancy/expensive car, you can do so and if you are using it heavily for business (i.e., having really high mileage) because it's necessary to have that expensive car, you should roughly get as much deduction as one who'd leased a less expensive car. If you just leased it to have a nice car, you will essentially get no deduction because you'll have neither the miles nor the monthly lease payment to yield a positive deduction.

Note: as stupid as it sounds, the IRS calls the damn numbers/amounts "inclusion" amounts because by reducing a taxpayer's deduction by those amount, the effect is the same as if one included the amount back into the taxpayer's income. Don't ask; don't comment. That's how the IRS sees it, and at least the theory isn't wrong, despite the fact that the name could have been something that makes more sense to taxpayers not benefited with an internal tax department.

'07, e92 335i, Sparkling Graphite, Coral Leather, Aluminum, 6-speed