Tax revision has changed the equation for buying versus leasing a car. Unfortunately, it hasn't made the decision any easier.
The new law, because it eliminates sales tax deductions and phases out the consumer interest writeoff, makes buying a new car more expensive in after-tax dollars. But other provisions of the revised tax law raise the price of leasing a car as well.
In the end, accountants say, the advantages and disadvantages of leasing remain essentially unchanged. For most non-business consumers, it's cheaper initially but more expensive in the long run.
Commenting on recent changes in tax laws affecting automobile leasing, Sherman Oaks accountant Keith A. Glucksman said: "When it's all said and done, more was said than done.
"The change in the tax law as it pertains to leasing should have no influence on one's decision to lease or finance an automobile."
That decision should be based on an individual's tax bracket, how he plans to use the car and what other uses he might have for the money that would be used for a down payment, Glucksman said.
Those promoting leasing, however, say that while the new tax law makes it more expensive either to buy or lease a new car, the combined effects of the law's changes make leasing more enticing than before.
The new law eliminates the deduction for sales tax and phases out the interest deduction over the next four years, making the purchase of a car more expensive. That's why we saw the flurry of car advertising and car buying in December as auto makers urged consumers to take advantage of the disappearing benefits of the old law.
But leasing companies, too, are finding their costs rising under the new law and are passing on their higher costs to their customers. The new tax law eliminates the leasing firms' investment tax credit and strictly limits the size and rate of allowable depreciation on automobiles. The depreciation allowance for cars has been capped at $16,000 over five years to eliminate the unlimited depreciation that had become a taxpayer subsidy for the purchase of Lincolns, limousines and top-of-the-line imports.
Both provisions--as well as the fact that leasing companies, like individuals, can no longer deduct sales taxes--add to the costs of leasing a car.
"Our general opinion is that although neither alternative is as attractive as they were before the law changed, leasing is now more attractive (than buying)," said Bill Niemi, sales manager at Mercedes-Benz Hollywood. "The elimination of the sales tax writeoff and reduction of the interest writeoff virtually eliminate any advantages of a purchase. Leasing becomes more attractive as an alternative."
Leasing is particularly important to a Mercedes dealership because of the high cost of the cars, Niemi noted. The cheapest Mercedes now sells for about $25,000, and several models cost more than $50,000. The high down payment and the monthly payments on a conventional bank loan for such a car are prohibitive for most car buyers, with payments often approaching $1,000 a month.
Leasing, however, offers a cheaper way into these cars. Up-front costs are minimal and monthly payments are hundreds of dollars less.
One Los Angeles Mercedes dealership, for example, offers a five-year lease on a $40,250 Mercedes 300D Turbodiesel with monthly payments of $400. Over the life of the lease, including a $4,628 down payment, the customer pays $30,187. However, if at the end of the lease period he wants to buy the car, he still owes $19,320, the so-called residual payment.
Thus, the total cost of the car is about $49,500.
By contrast, under a five-year, 10% conventional loan with an equivalent down payment, the monthly payments would be $757, for a total cost of $50,040.
The roughly equal figures can be deceiving, however. The lease customer who wants to buy the car must make a lump-sum payment of nearly $20,000 at the end of the lease period. If he finances that payment, the cost of the car goes up several thousand dollars because of interest charges. If he pays cash, he forfeits the interest income or other investment gains from his $20,000.
The car buyer, on the other hand, can lower his costs by shopping around for a cheaper loan, borrowing for a shorter period or putting more money down on the car, thus lowering his interest charges.
"Better than 50% of the cars we deal go out on leases," Niemi said. "And of those, nearly 70% are business leases. The person brings the car into his business and writes it down as a depreciable asset."
Niemi noted that most people who lease cars, especially for business use, simply turn in the keys and walk away at the end of the lease period.
This method is fine for people who own their own businesses or are self-employed professionals such as doctors and accountants and can write off the full lease payment as a business expense. But for the average consumer, the benefits are not so clear-cut.