Leasing vs Purchasing a Luxury Vehicle Economic Tax

Leasing vs. Purchasing a Luxury Vehicle Economic & Tax Impact of Auto Acquisitions Mercedes Benz of Long Beach Monday, June 19, 2006

Presented by: Blake E. Christian, CPA, MBT Prior to joining the firm, Blake was a tax partner with the international accounting firm of KPMG Peat Marwick and also served as Tax Director with a Fortune 500 corporation. Blake received a master's degree in taxation from the University of Southern California and completed a bachelor's degree in business administration from California State University Long Beach. Blake’s clients include multi-national, publicly traded corporations, as well as closely held, owner-managed businesses. His industry concentration includes manufacturing and distribution, service companies, shipping and transportation, and healthcare. In addition to corporate, partnership and individual tax compliance and planning, Blake specializes in California and federal tax incentive programs - with concentration on the California Enterprise Zone credit program. In the last two years alone, HCVT has identified over $20, 000 of EZ credits for their clients. Blake has lectured at a number of universities, including University of Southern California (MBT Program) and California State University Long Beach (Annual Tax Conference). Blake has also been a technical resource for a number of news organizations, including USA Today, Los Angeles Times, KTLA News, Orange County News. Channel, KNX News. Radio, and KFI Radio. Blake is a member of the Tax Division of the American Institute of Certified Public Accountants, the California Society of Certified Public Accountants, the Tax Section of the State Bar of California and a member of the Long Beach Estate and Trust Council. Blake is a member of Long Beach Rotary, the Los Angeles Harbor Association and the Long Beach Chamber of Commerce Board Member/Leadership Council Member. He has also been a charter member and Vice. Chairman of the (post-bankruptcy) Orange County Treasury Oversight Committee since 1995 and The Boeing C-17 “Red Team. ” 2

LEASE VS. BUY? [A] Applicable during lease measurement period. Ignores impact of costs due at lease signing, down payments and residual buy-outs. [B] Represents a modified loan amortization so that lease residual and unamortized loan amounts are equal at the end of lease term. 3 3

LEASE TERMS 4 4

PURCHASE TERMS 5 5

DEPRECIATION/LEASE INCLUSION TABLES FOR LUXURY AUTOS Depreciation Table Lease Inclusion Table (FMV of $100, 001 - $110, 000) Period Current Year Depreciation Expense Accumulated Depreciation Cost Basis Period Current Year Depreciation Expense Year 0 119, 075 Year 0 - Year 1 3, 260 115, 815 Year 1 413 Year 2 5, 200 8, 460 110, 615 Year 2 908 Year 3 3, 150 11, 610 107, 465 Year 3 1, 347 Year 4 1, 875 13, 485 105, 590 Year 4 1, 616 Year 5 1, 875 15, 360 103, 715 Year 5 1, 867 Year 6 1, 875 17, 235 101, 840 Year 6 1, 867 Year 7 1, 875 19, 110 99, 965 Year 8 1, 875 20, 985 98, 090 Year 9 1, 875 22, 860 96, 215 Year 10 1, 875 24, 735 94, 340 Years 11 -20 18, 750 43, 485 75, 590 Years 21 -30 18, 750 62, 235 56, 840 Years 31 -40 18, 750 80, 985 38, 090 Years 41 -50 18, 750 99, 735 19, 340 Years 51 -60 18, 750 118, 485 590 Year 61 590 119, 075 - 6 6

6, 000 LBS. EXCEPTION Vehicle Model Gross Weight (lbs) MSRP Dodge (Continued) BMW X 5 Vehicle Model MSRP 6, 005 $53, 845 Cadillac Sprinter 8, 550 $32, 391 Ram 1500 6, 650 $26, 930 Escalade 7, 000 $54, 280 Ram 2500 11, 000 $29, 160 Escalade ESV 7, 200 $56, 160 Ram 3500 11, 000 $32, 610 Escalade SRX 7, 000 $43, 940 Ford Econoline E 350 Van 9, 500 $24, 460 Chevrolet Astro Passenger Van 6, 100 $27, 620 Econoline E 350 Pass. Wagon 8, 700 $27, 590 Avalanche 1500 7, 000 $36, 062 Excursion 8, 900 $43, 650 Avalanche 2500 8, 600 $36, 545 Expedition 6, 650 $37, 185 Express Pass. Van 3500 9, 600 $30, 525 F 150 Styleside 6, 500 $28, 345 Silverado 1500 6, 400 $28, 600 F 250 Super Duty 9, 900 $28, 950 Silverado 2500 8, 600 $31, 999 F 350 Super Duty 11, 200 $30, 110 Silverado 3500 11, 400 $34, 200 GMC Suburban 1500 7, 200 $41, 907 Safari AWD Pass. Van 6, 100 $27, 620 Suburban 2500 8, 600 $41, 280 Savana Pass. Van 3500 9, 600 $30, 525 Trailblazer 6, 400 $32, 470 Sierra 1500 6, 400 $31, 170 Tahoe 6, 800 $38, 530 Sierra 2500 8, 600 $32, 161 Sierra 3500 11, 400 $33, 270 Dodge Durango 6, 400 $33, 280 Sierra Denali 7, 200 $44, 255 Ram Cargo Van 3500 8, 700 $22, 150 Yukon Denali 7, 200 $44, 695 Ram Maxi. Van 3500 8, 700 $22, 010 Hummer H 1 10, 300 $111, 845 H 2 8, 600 $50, 590 7 7

6, 000 LBS. EXCEPTION (CONTINUED) Vehicle Model Gross Weight (lbs) Vehicle Model MSRP Isuzu Lincoln Aviator 6, 210 $43, 387 Ascender Navigator 7, 450 $51, 960 Land Rover Blackwood 6, 780 $52, 500 Mercedes G-Class Gross Weight (lbs) 6, 834 $81, 675 GL-Class N/A $55, 675 ML-Class 6, 239 $40, 525 Pathfinder Armada 6, 800 $37, 600 Titan 6, 486 $28, 950 6, 790 $73, 165 Land Cruiser 6, 860 $53, 915 Sequoia 6, 600 $38, 080 Tundra 6, 200 $23, 835 6, 200 $38, 415 6, 400 $34, 197 Discovery 6, 064 $37, 995 Range Rover 6, 724 $71, 865 GX 470 6, 000 $45, 700 LX 470 6, 860 $64, 800 Lexus Nissan Porsche Cayenne Toyota Volkswagen Touarag Other Vehicles to Note - Rolls-Royce - Bentley - Maybach 8 8

TAX IMPLICATIONS OF BUY V. LEASE Purchase Lease Can I take a tax deduction? Only on the portion used for business (personal use is a non-deductible expenditure). How is the tax deduction determined? The original cost of the vehicle is depreciated over a number of years, which depends on the price and weight of the vehicle. The lease payments are deductible in the year payments are actually made. Are there limitations to the amount of the tax deduction? If the vehicle is 6, 000 lbs or less, the luxury auto limitations restrict the amount of the depreciation deduction taken in a given year and lengthens the time in which the benefits of a tax deduction is realized, depending on the purchase price of the vehicle. The auto lease inclusion is netted against the amount of the lease payment deductions (#2 above). Since the lease payment includes sales tax, depreciation and other costs, the tax deductible amount under a lease is typically higher than a purchase. On what types of vehicles do the above limitations apply? Vehicles with a “gross vehicle weight” of 6, 000 lbs. or less. Sample vehicles that would not be subject to the limitations range include the Ford Expedition, the Dodge Durango and Hummer H 2. At what fair market value (FMV) of the vehicle do the limitations begin to apply? For 2005, FMV approximately in excess of $14, 800 for passenger autos; FMV in excess of $16, 300 for trucks and vans; FMV in excess of $44, 400 for electric vehicles. For 2005, FMV approximately in excess of $15, 200 for passenger autos; FMV in excess of $16, 700 for trucks and vans; FMV in excess of $45, 000 for electric vehicles. Is the interest expense deductible? The interest expense incurred on the financing of the vehicle is deductible not subject to limitations, to the extent that the vehicle is used for business. With leases, the term for interest is called “money factor”. The “money factor” is built-in to the lease payments and therefore, there is an indirect minor limitation via the “auto lease inclusion” rules. Can I take a Section 179 deduction in the year of acquisition? For vehicles 6, 000 lbs. or less, due to the “luxury auto limitations”, a Section 179 expense is not allowed. For vehicles over 6, 000 lbs. up to 14, 000 lbs. , the maximum Section 179 deductions for 2005 is $25, 000 for both federal and California. For vehicles over 14, 000 lbs. , the maximum Section 179 deductions for 2005 are $105, 000 and $25, 000 for federal and California respectively. Section 179 deductions are not allowed for a true lease. Note: All of the above rules only apply on the business-use portion of the vehicle. 9 9

EMPLOYEE BUSINESS EXPENSES 10 10

CONCLUSION CONSIDER PURCHASING IF: Ø You are acquiring a vehicle weighing more than 6, 000 lbs. Ø You are acquiring a vehicle under $30, 000. Ø You use the vehicle for less than 25% business use. Ø You have plenty of cash or have easy access to lowinterest loans. Ø You are inclined to keep your vehicle for 5 years or more, or average more than 15, 000 miles per year. 11 11

CONCLUSION (CONTINUED) CONSIDER LEASING IF: Ø You prefer luxury vehicle. Ø You tend to want a new vehicle every 3 -4 years. Ø You want to minimize monthly payments. Ø You use the vehicle for business and want to maximize deductions (NOTE: Consider front-loading tax deductions by increasing down payment on a lease). Ø You don’t like the hassle of selling your old car. Ø You are purchasing a “unibody” car. 12 12

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