Government Will Help You Buy Exotic Cars

Or am I really limited to writing off only $2,960 in the first year? That is right, if you follow the advice and directions in this article the government will pay 40% or more for your exotic car, or other business vehicle.

Just follow the methodology and see how the tax code allows you to legally do this.  It is  based upon what the Internal Revenue Code specifically allows you to do, if you are willing to jump through the hoops it requires.

Let’s address how this gets done.

1. You need to own an interest in an active trade or business.  (Active meaning that it is some type of operating company.  It can be a service business, such as; law, accounting, engineering, a manufacturing company or any type of active business entity)

2. You will need to create a new entity, a leasing company, that will purchase the vehicle and lease it to your active company.  (The entity must have flow through taxation, preferably an S corporation, though other types of business entities without a federal level of taxation will work).

3. Your operating company must enter into a fair market written lease agreement  with your leasing company for the vehicle.  (The dealer that sold you the car can assist you in what the cost would be to lease it.)

4. You must have more than a single car in your leasing company.

It is so far not too complicated, but what do you now do??

Let us use a  hypothetical example. 

You own a profitable operating company, and have a second entity, or create a second entity, that owns your office equipment, computer equipment, other personal property, maybe even an office building that you will or are currently leasing to your operating company.  You have done well and decide to reward yourself with a vehicle that you only use for business.  The vehicle’s purchase price is $125,000.  (It can be any type of vehicle and at any price point though the maximum first year depreciation for 2007 is
$125,000)

Your leasing company purchases this vehicle, it can be new or used, and in 2007 enters into a lease with your operating company to lease the car.  (As you have exceptional credit, the bank does not require any down payment for your vehicle, or you have the company take a conventional loan)

On your 2007 leasing company income tax return, you have net leasing income, before  the automobile purchase, in this example of $125,000.  The $125,000 of net leasing income will end up on your personal income tax return, as it is an S corporation, and cause you to incur $50,000 of income tax.  ($125,000 of  income  X 40% tax rate)

Since the leasing company purchased a vehicle and has it in service by December 31, 2007, you can use first year bonus depreciation, IRC §179,  and deduct  the full vehicle’s purchase, up to $125,000, in 2007.  This depreciation deduction, reduces your leasing company’s income by $125,000 to $0.  Since your income has been reduced your corresponding income tax has been reduced in 2007. 

Your income tax, in this example, has now been reduced by $50,000 for 2007.  ($125,000 income reduction x 40% tax bracket).  (Compare this to regular depreciation without a leasing company of only $2,960 the first year! Versus $125,000).  Therefore, you get the car, and the government just allowed you to reduce your current years taxation by $50,000!

You get the car, the government reduces your current year’s income tax, by $50,000 and the dealer sells another car.  Everyone is or should be happy, a classic, win, win.

When you do a business transaction, remember to look at how you can structure a transaction to give you a tax benefit.  Many times it means you need an experienced tax lawyer to read all pieces of the tax code and determine how this complex jigsaw puzzle gets put together!