In the used car leasing model, the LHPH dealer becomes the lessor with ownership of the assets they lease to the consumer and retain in their portfolio. This opens new opportunities for the dealership from a tax perspective. The ability to depreciate the assets in your LHPH portfolio over time and report those losses on your Federal Income Tax in the form of a Net Operating Loss (NOL) is another significant advantage of LHPH. These NOL’s can allow a LHPH dealer to reduce their annual income tax liability significantly. While this has always been a compelling reason to migrate to LHPH, the new tax law in 2018 served to compound the benefits of leasing.
Whether you decide to use the bonus depreciation or follow straight-line depreciation standards, either model provides strong advantages over a BHPH portfolio. The 2018 Tax Cut and Jobs Act provided LHPH dealers with the ability to utilize 100% bonus depreciation of used vehicle assets in the first year for leases originated between now and 2023. After that time, the 100% bonus depreciation will decrease by 20% per year. This new law provides another tax savings opportunity for the near future. Alternatively, lessors can follow straight-line depreciation and depreciate the entire value of the asset the first year the vehicle is leased. All up-front profit is deferred, which results in little or no tax liability for the remaining years of the lease
Either way, there are strong tax advantages to a LHPH program for at least the next four years. It is important to work with your CPA to forecast the impact of bonus and standard depreciation on your current and future tax liability as you assess the right LHPH structure for your business.