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by Renee Fellows
November 7, 2008— You’re a small building contractor with a moderate fleet of company trucks. You lease the vehicles because it made good business sense to lease rather than purchase them outright. This week, the big three U.S. automobile manufacturers announced that they are either cutting back on the number of leases they will offer or “pulling out of the leasing business altogether.” Now what? With your company’s lease terms winding up at the end of the year, what options do you have to keep your fleet without going to the poorhouse?
Why the sudden drop-out?
Historically leasing has been a viable business for auto manufacturers. Dealers could sell higher cost vehicles with a lower entry rate and then resell the vehicle at the end of the lease agreement for even more profits. But with gasoline prices hovering at $4 per gallon and resale of trucks and SUVs at an all time low, auto dealers found themselves left holding thousands of vehicles that won’t budge off their lots.
General Motors posted a second quarter of losing profits for its leasing division, GMAC Financial Services, of nearly $2 billion dollars reported due to losses in its leasing division. GMAC said that “it planned to cut its leasing business by 50% this year, maybe more, in an effort to help mitigate loses.” Chrysler, LLC last week announced that it was eliminating its leasing program and Ford Motor Company said that it was raising the financing on its leases for large trucks and SUVs.
What does that mean for small business?
In the U.S. the Small Business Administration (SBA) estimates that approximately 20% of automotive financing is done through lease agreements. While that may seem like a big number consider that Canadians lease closer to 50% of their vehicles and in the busy metropolis of Toronto, the number soars to nearly 80%. Finance companies play a significant role in financing lease agreements for small business owners. According to the SBA’s April 2005 Small Business Research Summary, additionally “finance companies provided 20% of all equipment loans and 18% of capital purchases.” Leasing may still be a viable financing alternative, but business owners may need to be a bit more creative in their source selection.
Independent Leasing Agents
When the Chrysler dealer down the road won’t give you the lease you’d like, don’t fret. Try a leasing agent. You can remove the middle man dealership and go straight to the leasing agent who will broker the vehicles for you. “The dealership is paid for the entire vehicle, the small business receives a leasing arrangement that works for them and everyone is happy,” says Stu Lustman, VP of Business Development at Southern Lending Solutions, a small business finance company located in Atlanta, GA.
Depending on the leasing agent, a small business owner can lease a single vehicle or an entire fleet. The fleet can be leased over time with a master lease agreement where the terms are agreed to ahead of time for subsequent purchases. While companies like Southern Lending Solutions typically work with clients in the $500,000 to $10 million revenue range, Lustman says with vehicle pricing on the rise and the fall-out from the leasing market, he would be more willing to work with single leases even though they aren’t in his regular target market.
Other options include your bank, credit union or other lending institution. Many private lending agencies are still offering leasing options to their customers however, the rates may not be as generous as they once were.
To Lease or Not to Lease - Tax Implications for Small Business
The IRS requires vehicles with a fair market value of more than $17,500 to decrease the amount of the lease by the ‘inclusion amount’ which is a percentage of the FMV multiplied by the percentage of business use for each tax year. (This number can be found on the inclusion-amount tables of Appendix A of IRS Publication 463). For example:
| Year Lease Began |
|
FMV* |
2007 |
|
$15,500 |
2005-2006 |
|
$15,200 |
2004 |
|
$17,500 |
2003 |
|
$18,000 |
1999-2002 |
|
$15,500 |
* For 2007, the FMV for trucks and vans is $16,400 |
When evaluating leasing for business purposes don’t forget to consider the number of miles that you’ll put on the vehicle each year. Close-end lease agreements include a maximum mileage limit and a cost per mile overage charge. Open-end leases may be a better option if mileage is difficult to calculate or varies greatly from year to year. Before you sign, double check the lease agreement for late payment penalties, vehicle buy-out, and even maintenance requirements.
What’s allowed – Two methods for Deducting Auto Expenses
- Standard Mileage – This is definitely the easier choice for most small business owners who wish to deduct some of the travel expenses they incur through the course of regular business. Current mileage deduction is $.585 per mile (new rate effective 7/1/08) which covers fuel, maintenance and basic operation of the vehicle. There are also separate deductions for tolls, parking and the business percentage of your vehicle loan interest and/or personal property taxes.
Note: There are a few qualifying rules with using standard mileage:
* You cannot use standard-mileage rates if you have previously depreciated the vehicle using the second option (depreciation method) below.
* You use five or more vehicles simultaneously during the course of your business activity in any one year.
- Actual-cost – To use this method, the business owner MUST keep strict and detailed records of the vehicle’s use for business purposes. That means that you need records for every trip including date, starting point, destination, mileage (including odometer readings) and any and all receipts pertaining to the trip. The best way is to keep a journal in your vehicle and faithfully enter the data and receipts daily.
Just because you can claim the vehicle as a deduction, doesn’t mean that you should go out and purchase that dream Ferrari and claim it as a business expense. Remember that the vehicle must be used for business and that the deduction amounts listed below are for 100% business use. If you can only demonstrate 55% business use, the numbers will be dramatically affected (as seen to the right) and you’ll be old and grey before that car is ever reaches full depreciation.
Depreciation Amounts |
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Depreciation Amounts w/55% business usage |
| Year 1: $3,060.00 |
|
$1,683.00 |
| Year 2: $4,900.00 |
|
$2,695.00 |
| Year 3: $2,850.00 |
|
$1,567.50 |
| Year 4: $1,775.00 |
|
$ 976.25 |
| Thereafter: $1,775.00 annually |
$ 976.25 |
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What is ‘Heavy’ worth?
There is a silver lining to all these numbers. If you use a “heavy” SUV, pickup or van in your business for over 50% business use, you may be entitled to greater depreciation allowances. In IRS terms, “heavy” refers to the vehicle’s “gross-vehicle-weight rating” (GVWR) and must be above 6,000 pounds in order to qualify. The following percentages apply to heavy weight vehicle business deductions:
Year 1: 20%
Year 2: 32%
Year 3: 19.20%
Year 4: 11.52%
Year 5: 11.52%
Year 6: 5.76%
Note: Unlike ‘passenger automobile’ deductions above, the heavy vehicles only qualify for a six-year deduction.
There are also Section 179 deduction amounts available for certain pick-ups and vans used for over 50% business use. Heavy vehicles that are qualified as SUVs are eligible for a reduced Section 179 deduction rate of $25,000 in 2008. Talk with your accountant or tax advisor to see if you may qualify.
Leasing and purchasing decisions are big concerns for small business budgets. When in doubt, talk with your financial or tax advisor. To learn more, talk with a Fiducial Advisor by calling 866-FIDUCIAL or visit the web site at www.Fiducial.com.
Whatever your small business needs, your Fiducial tax and financial professional can analyze your situation and recommend an appropriate action plan. To locate a Fiducial office nearest you on fiducial.com, see the Zip Code Locator located in the upper right hand corner of the page. Do you have a particular topic that we should be writing about that can help your business? Please send your suggestions to: Howard.Margolis@fiducial.com.
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