Does leasing a car make financial sense if it's with pretax dollars?

[shanec]

Hello Mustachians,

Mustachian-in-training here with a leasing question: does it make sense to lease a car if we can pay for it with pretax dollars?

My wife and I would normally never consider leasing a new car but her employer will take the monthly premium out of her salary before taxes. Her new job has her driving a lot (I know, I know) so they consider it a business expense. Taxes are pretty brutal here in California so the potential savings are significant. Then again, we could just buy a used car with posttax dollars if that's the wiser option.

Does anyone have experience with this sort of thing? On paper it looks like a win over buying a used car but we've found dealerships fairly inflexible on their leasing terms, plus they slap on hefty monthly leasing fees.

Thanks,
Shane

[ixtap]

Would this benefit be in lieu of reimbursing travel expenses?

[shanec]

They gave her a corporate credit card to pay for gas but they don't reimburse her beyond that for miles driven.

[secondcor521]

I would negotiate an increase in pay in lieu of the before-tax lease payment.

Even if the lease looks better on paper:

1.  You're probably missing something on the math or in the contract which makes it a worse deal.

2.  You may not be comparing apples to apples - if you lease a $40K vehicle but would buy a $20K vehicle otherwise, the tax savings are dwarfed by the more expensive car.

3.  I really wouldn't want my car situation and my employment situation entangled like that.  Too many what if's - What if they want her to drive a nicer car than she wants to buy/lease?  What if she leaves that job?  What if she changes positions in that company to a position that doesn't offer a car benefit?  What if she wrecks the car?  Wants to lower the insurance costs by raising the deductible?  Wants to upgrade/downgrade/buy out the lease?

[Zamboni]

^Jeez, no wear and tear payment for using her personal vehicle? Even the govt manages to provide that . . .

It sounds like you will be acquiring a car for her one way or another. My questions would be: how cheap of a lease can she get? Do they restrict which vehicle it can be for, since they are paying for gas? Or can she decide to drive a gas guzzler like a hummer and they are still fine paying for gas?

With this deal, I would either drive my own beater which isn't worth much, or if she has no car at all right now perhaps shop for the absolute cheapest new car lease I can get with no consideration given to the MPG the car gets. If leasing, I'd plan to surrender the car at the end of the lease unless it was something I really wanted. Maybe a Kia Soul with a 3 year, $239/month lease? That way there probably wouldn't be much to pay in terms of repairs, since the car is new. But I'd only do it if I could get a really cheap lease, like under $300 a month. I hope that makes sense.

Also, she should find a different job . . . could even be the same type of job with lots of driving, but with an employer than either provides a fleet vehicle at their expense or gives a more generous mileage reimbursement.

[secondcor521]

Oh, and take whatever you're saving on buying a better, less expensive car and put it into pre-tax retirement savings.  Helps save for FIRE and also avoids those "pretty brutal" CA taxes.

[roomtempmayo]

her employer will take the monthly premium out of her salary before taxes. Her new job has her driving a lot (I know, I know) so they consider it a business expense.

If it's truly her's to use whenever, however she wants outside of work, classifying the entire lease as a business expense sounds pretty sketch.

I'd be concerned that at the last minute you'll be asked to sign a bunch of fine print stipulating the terms of how the car is used that will get them off the hook in the event of an audit and leave you dangling in the wind.

[shanec]

Thank you all for your input, it's given us different angles to help ponder the situation.

Secondcor521, as you pointed out, to some extent we aren't comparing apples to apples. We'd never buy a new car, much less lease one--our preference would be to get a decent used car and keep it for 10-15 years. But at the same time we're wondering if there isn't some financial upside to this "perk" her employer offers.

Muddying the waters is the fact that I don't know what our effective tax rate will be once the dust settles. Assuming a 25% tax rate for simplicity, it seems that she'd have to earn the same amount of income to spend $30k pretax on a lease as purchasing a $20k vehicle posttax. But what we're finding is the leasing fees quickly start to neutralize the potential savings.

Zamboni, no, they don't seem to restrict gas spending or what vehicle she gets at all. The only rule is they want it to be a lease.

I'll have to crunch some numbers on a really cheap lease since that might make financial sense. But on the other hand it seem wrong to put money into a lease and the surrender the car after 3 years because we'd have nothing to show for the money. But it's possible that's a financially sound thing to do.

And caleb, yes, I agree that it seems a little shady. I don't think she has to sign anything with them beyond her employment contract.

[reeshau]

3.  I really wouldn't want my car situation and my employment situation entangled like that.  Too many what if's - What if they want her to drive a nicer car than she wants to buy/lease?  What if she leaves that job?  What if she changes positions in that company to a position that doesn't offer a car benefit?  What if she wrecks the car?  Wants to lower the insurance costs by raising the deductible?  Wants to upgrade/downgrade/buy out the lease?

I would definitely expect some kind of requirement as to the class of car, if not specific models.  Also, since this is a lease, but there is unlimited gas: what is the mileage allowance on the lease? And how does the company handle overage charges?

I would certainly at least want the lease term to match the expected annual mileage.

[shanec]

I would definitely expect some kind of requirement as to the class of car, if not specific models.  Also, since this is a lease, but there is unlimited gas: what is the mileage allowance on the lease? And how does the company handle overage charges?

I would certainly at least want the lease term to match the expected annual mileage.

The lease would be between my wife and the dealer with her employer simply taking the month premium out of her paycheck before deducting taxes. So the mileage charges would be whatever we negotiate with the dealer.

But all this is becoming a moot point, because after pondering the above comments and the situation more, we're starting to realize that the lease option is almost certainly a bad financial decision even with pretax payments. Buying a modest used car with posttax dollars seems wiser.

It was an interesting thought experiment but the conventional MMM wisdom still holds. And it's been eye-opening how expensive leasing a new car is!