Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, August 14, 1995 TAG: 9508140013
SECTION: BUSINESS PAGE: A8 EDITION: METRO
SOURCE: By MAG POFF STAFF WRITER
DATELINE: LENGTH: Medium
New car prices are increasing, and the interest on car loans is no longer tax deductible. Those factors have made leasing a popular alternative for many people.
Whether leasing is right for you depends on a number of circumstances, according to the Virginia Society of Certified Public Accountants. They include your financial situation and how you plan to use the car.
The CPAs said leasing may be your best option if you can't afford a down payment, prefer not to tie up your cash or simply like driving a new car every few years. It also may make more sense if you use your car for business.
However, before deciding to lease rather than buy, the society recommended that you familiarize yourself with leasing terminology and understand the Internal Revenue Service's treatment of leased cars used for business.
Sizing up a leasing deal can be more difficult than negotiating a purchase, the society said, mainly because federal law does not require leasing companies to disclose some important financial details.
While dealers and leasing companies would like simply to use monthly payments as the standard for comparison, negotiating the best deal often means knowing what's behind the monthly payment.
Although it's difficult to compare one lease with another precisely, the CPAs said you should concentrate on the three factors that determine the monthly payment - all of which are negotiable.
Capitalized cost, or the equivalent of the sales price. It should be negotiated just as if you were buying the car.
Residual, which represents how much the leasing company estimates the car will be worth at the end of the lease term.
This number is crucial because the higher the residual, the less you'll pay for depreciation and the lower your monthly payment.
If you intend only to lease a car and not eventually purchase it, look for a car with a higher residual value and lower monthly payments.
Term. Leases typically run 24 to 48 months. This makes leasing attractive for people who want a new car every three years or so because leasing allows them to move from car to car without the problem of selling and without the need to come up with a large down payment every few years.
The CPAs warned that you should look before you lease.
Most leases allow 15,000 miles a year. More mileage than that will cost you 10 to 15 cents a mile, which can add up to a considerable sum. If you think you will drive more than the number of miles specified in the lease, you'll generally come out ahead by purchasing extra miles up front rather than paying excess mileage charges at the end of the lease.
If your car is not well maintained, the CPAs warned, be prepared to pay for excess wear and tear. These charges can run into hundreds of dollars, so you will want to protect yourself with a lease that defines as clearly as possible what is considered to be excessive wear and tear.
You also should carefully examine the early termination provisions of your lease. Most leases carry serious penalties for getting out early. If you think there is any chance you may need to get out of the contract ahead of schedule, you probably shouldn't consider leasing.
If you're planning to use a leased car for business, the CPAs said, don't expect simply to write off your lease payments.
You must keep accurate mileage records, differentiating between business and personal miles. Then you apply the business percentage to the sum of (1) the total of your actual expenses for the year - including gas, oil, maintenance and insurance - but excluding depreciation, and (2) all your lease payments for the year.
The CPAs gave the following example:
Assume that during the tax year 75 percent of the mileage on your leased car was for business. You spent $3,600 on lease payments and $1,400 on operating costs. In such a case, the deduction would equal $3,750, or 75 percent of your total outlay of $5,000.
Keep in mind, however, that you may be required to add back part of the lease deduction as income.
Finally, the CPAs pointed out that, when leasing a car for business, it's important to keep comprehensive records of your operating costs, such as oil, repairs and insurance, because these will affect the size of your deduction.
by CNB