[maxiedaniels]

Let's just pretend for a minute that it's not difficult to find an M2.

My issue is that I've been told by my CPA that I should lease because of the tax write-off. However, leasing seems to be horrendous for this car. But, does that mean BMW expects this car to depreciate poorly?

I'd have to sell investments to be able to afford buying the M2 without financing, so that isn't something I'd like to do. I did read about balloon payment financing though, and I'm curious how people feel about it. BMW Select is a form of that, right?

My CPA says I can take a depreciation deduction, so all good there. But, am I mistaken to think I can roll the interest payments and estimated depreciation into a single monthly payment towards my loan, and then at the end of the term sell the car and be able to break even? An important factor of this thought process: I'm probably driving less than 5k miles a year.

[gmzanatta]

At the current interest rates, buy it, even with finance, because it won't be as big a hit as leasing.

BMW knows it will hold it's value, so that's why the leases are so poor. You pay more upfront and then they sell it for a huge differential once your lease is over.

[F87LUV]

Originally Posted by maxiedaniels

Let's just pretend for a minute that it's not difficult to find an M2.

My issue is that I've been told by my CPA that I should lease because of the tax write-off. However, leasing seems to be horrendous for this car. But, does that mean BMW expects this car to depreciate poorly?

I'd have to sell investments to be able to afford buying the M2 without financing, so that isn't something I'd like to do. I did read about balloon payment financing though, and I'm curious how people feel about it. BMW Select is a form of that, right?

My CPA says I can take a depreciation deduction, so all good there.But, am I mistaken to think I can roll the interest payments and estimated depreciation into a single monthly payment towards my loan, and then at the end of the term sell the car and be able to break even? An important factor of this thought process: I'm probably driving less than 5k miles a year.

Well you're in luck. I'm a CPA with an M2 that also took out a balloon loan.

I'm not entirely sure that I understand your question. If you do BMW select/owners choice, I suppose that can be viewed as a close end lease and you can actually treat the payments as lease payments that would be deductible. You would only deduct your payments times your business use percentage. Now if you go through a bank like penfed, I don't think you can treat this a close end lease because you can't give the car back and walk away. The liability for the balloon would be yours so in this case, the car could be depreciated and you could also deduct interest expense.

[zenmaster]

Originally Posted by maxiedaniels

But, does that mean BMW expects this car to depreciate poorly?

Lacking data on the new model, they chose to be conservative which they can easily afford to do on this niche-market product. Since the demand is there, I'd expect actual 3-year residual to be in the 60% range or better. That is, unless and until they ramp up production and/or introduce an improved model targeted at same market.

[maxiedaniels]

Originally Posted by F87LUV

Well you're in luck. I'm a CPA with an M2 that also took out a balloon loan.

I'm not entirely sure that I understand your question. If you do BMW select/owners choice, I suppose that can be viewed as a close end lease and you can actually treat the payments as lease payments that would be deductible. You would only deduct your payments times your business use percentage. Now if you go through a bank like penfed, I don't think you can treat this a close end lease because you can't give the car back and walk away. The liability for the balloon would be yours so in this case, the car could be depreciated and you could also deduct interest expense.

Very interesting! Okay wait, I got lost on some of that terminology. What would provide the best write off? Going through a bank?

[Dave07997S]

Originally Posted by gmzanatta

At the current interest rates, buy it, even with finance, because it won't be as big a hit as leasing.

BMW knows it will hold it's value, so that's why the leases are so poor. You pay more upfront and then they sell it for a huge differential once your lease is over.

You can always sell the car before lease end and make the windfall yourself. Every M3 I have sold by the end of the lease and walked away with a substantial amount of money.

Dave

[BEM-S4]

Originally Posted by Dave07997S

You can always sell the car before lease end and make the windfall yourself. Every M3 I have sold by the end of the lease and walked away with a substantial amount of money.

Dave

Right but that's not really a "profit" per se. You paid for more depreciation than actually occurred during your lease then got a "rebate" by selling it.

[CityLife]

Originally Posted by Dave07997S

You can always sell the car before lease end and make the windfall yourself. Every M3 I have sold by the end of the lease and walked away with a substantial amount of money.

Dave

Why not just finance or do a balloon finance? By leasing and then buying out and immediately selling, you are buying out based on full MSRP and not what price you negotiated correct? In the case of the M2 everyone is paying MSRP anyways so it is a good option, but the example you gave involves M3s which can be had at a discount.

[Aloha Joe]

Originally Posted by maxiedaniels

Very interesting! Okay wait, I got lost on some of that terminology. What would provide the best write off? Going through a bank?

What F87 meant is, if you are able to return the car to the financing company, you can deduct your monthly payments up to the percentage of your business use. In other words, if 70% of your miles driven is for business use, and lets say your monthly payments are $800. You get to deduct $560 (70% of $800) of it as a business expense.

If you are not able to return the car to the financing company, then this could be considered a purchase and you would not be able to deduct the $560 a month. But you would be able to get a depreciation deduction of 70% (miles driven for business) of $3,160 in the 1st year, 70% of $5,100 in the 2nd year and 70% of $3,050 in the 3rd year.

Keep in mind, that you can get the $560 deduction a month for the first 3 years then purchase the car at the end of the lease and still enjoy the depreciation deductions in paragraph 2.

If a high percentage of your miles driven are used for business and you plan to keep the car for 6 years, then it's very advantageous to lease for 3 years and then purchase at the end of the lease term. It can also be very advantageous if the residual factor is low for us business owners. But not good for those who can't deduct and plan to return the car after the 3 year term.

[F87LUV]

Originally Posted by maxiedaniels

Very interesting! Okay wait, I got lost on some of that terminology. What would provide the best write off? Going through a bank?

Without knowing specific details, I can't really comment and it would a become more complicated. I don't think you want me pay $500/hr.

Keep in mind that if your business use is under 50% then everything changes as well. It seems that the simplest way of going about this based on what you've said would be a balloon loan through BMW so your payments are lower than a standard lease, you can write off the "lease" payments but you'll have the option to return or buy.

[maxiedaniels]

Wow my CPA glossed over that. So to be clear: if I do a balloon finance through, say, PenFed, then I can only write off my 80% business use of $3160 1st year, $5100 2nd year, etc?

That versus leasing where I'd be able to write off the whole lease payment?

I have to do the math properly but it seems like leasing, even at a higher cost, is better?

[Aloha Joe]

Originally Posted by maxiedaniels

Wow my CPA glossed over that. So to be clear: if I do a balloon finance through, say, PenFed, then I can only write off my 80% business use of $3160 1st year, $5100 2nd year, etc?

That versus leasing where I'd be able to write off the whole lease payment?

I have to do the math properly but it seems like leasing, even at a higher cost, is better?

PenFed Ballon Payment car loan is a purchase. You can't return the car to PenFed at the end of the term, unlike BMW's Owners Choice, which you can. So it appears that you're correct on your first question.

For your question #2, it's 80% off for you, not 100% (percent of miles used for business), of almost your total lease payment. I say almost because there is a very small income add back adjustment due to a lease, but it's so small that it normally won't affect why you would lease or not.

For your question #3, it very well could be, depending on percentage of miles used for business. At your projected 80% rate of usage, it would appear so. For me, I know it is, so I'll be leasing for 3 years, then purchasing the M2 at the end and keeping it for at least 3 more years, providing everything goes well.

For me, a lower residual payment is preferred, with higher monthly payments in the first 3 years. Please keep in mind that like you I am a business owner and in a higher income tax bracket, so this works out very well for me. However everyone else's situation can, and most likely be different.

[fuddman]

CPA wizards want to make people happy so they tell them about that little known gold mine they're entitled to. It's called depreciation. Buy a car. Write it off! Lower your taxes! what a deal!
Except the CPAs leave out the bad news. Which is a little known piece of this action the IRS calls "Depreciation Recapture." At some point down the line, after all the fun, your CPA will break the bad news to you. It goes something like this: "Remember the taxes I saved for you with depreciation on the car? Well now the IRS wants it all back."

[Yvette]

Originally Posted by Aloha Joe

PenFed Ballon Payment car loan is a purchase. You can't return the car to PenFed at the end of the term, unlike BMW's Owners Choice, which you can. So it appears that you're correct on your first question.

For your question #2, it's 80% off for you, not 100% (percent of miles used for business), of almost your total lease payment. I say almost because there is a very small income add back adjustment due to a lease, but it's so small that it normally won't affect why you would lease or not.

For your question #3, it very well could be, depending on percentage of miles used for business. At your projected 80% rate of usage, it would appear so. For me, I know it is, so I'll be leasing for 3 years, then purchasing the M2 at the end and keeping it for at least 3 more years, providing everything goes well.

For me, a lower residual payment is preferred, with higher monthly payments in the first 3 years. Please keep in mind that like you I am a business owner and in a higher income tax bracket, so this works out very well for me. However everyone else's situation can, and most likely be different.

Very informative! Thank you

[Aloha Joe]

Originally Posted by fuddman

CPA wizards want to make people happy so they tell them about that little known gold mine they're entitled to. It's called depreciation. Buy a car. Write it off! Lower your taxes! what a deal!
Except the CPAs leave out the bad news. Which is a little known piece of this action the IRS calls "Depreciation Recapture." At some point down the line, after all the fun, your CPA will break the bad news to you. It goes something like this: "Remember the taxes I saved for you with depreciation on the car? Well now the IRS wants it all back."

You're correct to a certain extent. "Depreciation Recapture" only occurs on the amount of the asset that you sell above adjusted cost basis. As we all know, cars really do depreciate in value. So the recapture amount, if any ever occurs, will be small.

Example, you purchase a $40,000 car, take 70% (business mile usage) of the maximum automobile depreciation for 3 years, which comes out to $7,917. At this point, you decide to sell the car, for "Depreciation Recapture" to occur, you need to find a very generous buyer to pay you above $32,083 for the car.

And if you're lucky enough to find that rare buyer, recapture only occurs on the amount of the car that sold for above $32,083. So, for the IRS to take it all back? You need to sell that 3 year old car for the original $40,000!

[maxiedaniels]

Aloha Joe - thank you for clearing that up... Would you happen to know what "bonus" depreciation write off is? Apparently up to $8k on first year new cars?

[Ian ///M]

Originally Posted by F87LUV

Without knowing specific details, I can't really comment and it would a become more complicated. I don't think you want me pay $500/hr.

Keep in mind that if your business use is under 50% then everything changes as well. It seems that the simplest way of going about this based on what you've said would be a balloon loan through BMW so your payments are lower than a standard lease, you can write off the "lease" payments but you'll have the option to return or buy.

Those prices are pretty fair for the Beyoncé of CPAs

[fuddman]

Originally Posted by Aloha Joe

Example, you purchase a $40,000 car, take 70% (business mile usage) of the maximum automobile depreciation for 3 years, which comes out to $7,917. At this point, you decide to sell the car, for "Depreciation Recapture" to occur, you need to find a very generous buyer to pay you above $32,083 for the car.

The discussion, however, is about leasing a car. Not purchasing a car - which is your example. And the basis of a leased car partially used for business. And a car which the dealer agrees to a fixed buyback amount. And so forth.
Terms of Lease agreements are not the same as simple purchase agreements. Depreciation Recapture is based on the terms of the lease agreement. When you know those lease terms, you can say something about the amount of recapture.
In any event, in preparing a tax return, Depreciation Recapture must be taken into account by a CPA. A time consuming endeavor that, in itself, translates to billable time that the lesee must eventually cough up.

[maxiedaniels]

Originally Posted by fuddman

The discussion, however, is about leasing a car. Not purchasing a car - which is your example.

I'm confused - if I wasn't clear before, I'm talking about financing since leasing has terrible terms.

[Kouper]

Originally Posted by fuddman

At some point down the line, after all the fun, your CPA will break the bad news to you. It goes something like this: "Remember the taxes I saved for you with depreciation on the car? Well now the IRS wants it all back."

Excellent point, very real and something to be aware of it. I've experienced this a few times and had to "give" more than a small portion back, as my cars are typically low mileage, in excellent condition and have held their value well. It largely depends on how high your business % usage is, what kind of miles you expect to put on the car before you sell it, and of course the unpredictable market.

Originally Posted by Aloha Joe

You're correct to a certain extent. "Depreciation Recapture" only occurs on the amount of the asset that you sell above adjusted cost basis. As we all know, cars really do depreciate in value. So the recapture amount, if any ever occurs, will be small.

Example, you purchase a $40,000 car, take 70% (business mile usage) of the maximum automobile depreciation for 3 years, which comes out to $7,917. At this point, you decide to sell the car, for "Depreciation Recapture" to occur, you need to find a very generous buyer to pay you above $32,083 for the car.

And if you're lucky enough to find that rare buyer, recapture only occurs on the amount of the car that sold for above $32,083. So, for the IRS to take it all back? You need to sell that 3 year old car for the original $40,000!

Hmm, sell at the original MSRP three years later and give it all back?! Oh, like a 1M.
It remains to be seen until we know production levels, but the M2 might also have a recapture "problem" at some level - a problem everyone would be happy to have.

[Aloha Joe]

Originally Posted by maxiedaniels

Aloha Joe - thank you for clearing that up... Would you happen to know what "bonus" depreciation write off is? Apparently up to $8k on first year new cars?

You are correct, for 2016 it's increased by $8k to $11,160, for years 2 & 3 it remains the same.

[pruettfan]

The residual values on the M2 are terrible not because it is a car that will depreciate particularly poorly but because it is a new model and they don't need to push sales so why take the risk. Leasing is at an all time high so the manufacturers and dealer are getting nervous about the glut of lease returns and how that can impact the actual resale values so the experts are predicting manufacturers will become more conservative on residuals to cover themselves.

I believe BMW Select is a great way to go if you take good care of your car and especially if you drive low miles. We finance our cars at work this way (through Enterprise Fleet). It works well if you take good care of your car and if the balloon payment makes sense. Point is if you drive a ton of miles and take poor care of your car you probably won't have a car that matches in value at the end of the deal. Having said that if you just plan properly you won't be caught off guard.