Recently joined a consulting firm (as in two months ago) as a 1099 with a base monthly check, and the possibility of more per month based upon the business that comes in. Its not off a draw, I get X regardless of how much work there is. Since coming on board, business has picked up significantly, so compensation will as well.

The owner of the company has been a friend of mine for going on 25 years, he was in my wedding party. He is about to have another child, and the family SUV is not big enough. He leased a BMX X5 on a 36 month lease with 17 months remaining (approximately 22k miles left on the lease). He has offered to transfer the lease to me, and still make the payments as well as pay the insurance. This would be part of my compensation over and above the base. The value of the lease payment and insurance is around $900 a month, or almost $11,000 per year.

Upsides to this if I accept.

First and foremost it helps him out. He did me a solid by bringing me onboard when I really needed to make a career change.

Second, I get a much nicer vehicle than I have now, and it costs me nothing - no lease payment, no maintenance other than wear and tear like blades and tires.

Third, I can sell off my car which is paid in full and bank the money for an emergency, or down payment on a new vehicle in 17 months. I was planning on buying a new car in a year or so as I am driving a 2012 Kia Optima with 125,000 miles on it. KBB estimates PPV to be around $5,500 to $6,000.

Fourth, I save the money that I'm currently paying in insurance, which is about $90 a month, so another $1,000.

My car has been great to me, only needing tires, brakes, bulbs, blades, and oil changes... but things could start going very wrong given its age and mileage, and I could get out from under it before there are any potential expenses, or having to dump the car for cheap due to maintenance issues.

Fifth, since the lease would go into my name, I am pretty sure I can write it off as a business expense now that I'm a 1099 contractor, I've always been a regular salaried employee, so no business write-offs.

What am I not thinking about? Are there downsides to this proposal that I'm just blind to?

Sounds like a pretty sweet deal.  How does the X5 do on gas?  Is it a premium only model?  Gas adds up, but in this case it sounds like a sweetheart deal no matter what gas she drinks.

I would verify that maintenance is included. My mom has had 2 of these. They are pricey to maintain.  Also will you be able to stay within the remaining miles ?

You will also get a payroll adjustment for the value of this benefit...and you will pay the taxes on it.

Miles are not an issue, 17 months remaining on the lease and around 22k miles remain on the lease. I'm putting less than 1,000 miles a month on my vehicle with my new job. I also a 2005 GMC Sierra 1500 that I drive a day or two a week to keep the fluids running through the system - so there will still be a back-up vehicle if needed.

Yes, that's something I have to discuss with him, and really the only potential downside that I've been able to arrive at so far.

Exactly.  Your "earnings" will go up by the "$900 value" each month, but you will see no cash from those earnings while you will be paying additional taxes on it, lowering your cashflow.

Overall it's not a terrible deal for your described situation if you are able to stay within the miles of the lease and actually desire to have this type of vehicle.

It gives you the opportunity to sell your current vehicle at leisure and prepare for replacement without the extra risk of having an older vehicle without warranty.

I guess a potential downside is with him transferring the lease to you is the responsibility is now on you to pay it. You said he is going to pay it and the insurance but if you leave the job for any reason you will be on the hook for the lease payments. Probably not likely but say the business goes tits up you will be out of a job and have a big lease payment.

He told me last night he plans on paying off the lease upfront. He will pay me the lease payment each month, and I will then cut him a check each month to reimburse. We have to hammer out the details, but it seems like he is taking on the risk as I could leave the company and he would be stuck. No, I would never do that.

This is the HUGE appeal to me. I'm under no time crunch to sell the older vehicle, so I can hold out for my price.

Another thought I had was to maybe keep the Kia and use it as an Uber or Lyft vehicle and make some extra cash with it. Its in really good shape cosmetically, even for an older vehicle. I'd have to look into what I could potentially make driving fifteen hours a week taking drunks home.

How do you not realize the risk when he said TRansfer the lease to you?

If he prepays the balance of the lease, where is the financial risk in terms of the lease payments? Yes, I am responsible (my insurance) should there be an accident, and any non-covered maintenance is on me - tires, brakes, etc.

I've never leased a vehicle, so pardon me not tracking as this is uncharted territory for me and why I brought the question to this subforum rather than GD.

Thank you sincerely for any knowledge you can share.

Outside of the tax ramifications (talk to your accountant), I would probably take that deal as long as everything looked above board and everything would work out just like he sold you it would.

It's a cheaper way to postpone your new vehicle needs.  Just assume that your best estimate of how much $ you will save is less than you think (due to misc expenses/tax issues).

The only real question is "do you want to take the risk of being on the hook for the lease?" And "what is the risk that this business is going to go under in the next 17 months/what is the risk I'll not be employed there?"

But if it seemed stable, friend is a good business operator, and you are ok with everything on paper....AND you accept the risk of a pricey lease should something not go as planned....

Could be a good deal for you.  But only you really know how to estimate the risks.

Most leases these days are "closed ended" leases.  There is a pre-determined "value" to the vehicle at time of lease end.  You could buy it for that value & own it after the lease or turn it in.  Thus the "flexibility of the lease".

when a vehicle comes in from lease (turn in) it can have positive equity (Hot model in low miles) or negative equity (over miles, cracked windshield, ripped upholstery or smoke - doggy smells...)

If you turn it in with positive equity, the lease lender pockets that "extra" cash.

I used to advise clients to get a valuation of the Leased Vehicle as a TRADE in off the lease just before the turn in period as there MAY be positive Equity you could move to a "new" (or used) vehicle.

Example - Lease buy out value of vehicle is $25,000   Based on Miles & Condition (Used car market is hot Hot HOT these days) the Trade in Value is $28,000.   That is $3,000 in equity on the table you could apply to a different vehicle.  You can get a valuation from ANY source (CarMax or others).

If Valuation is Positive, you have money!   If not, the just turn it in and wash your hands of it.

However, look out for miles & condition gotcha's - Do you have all the keys, someone keys the car damages the paint, rock cracks or pits windshield, seat gets stains or rips. ...

GM used to rip off clients left & right and gave Leasing a terrible name over their open ended leases where the value of the car wasn't established until years later after you signed when you turned it in.  With terrible resale values on 80's & 90's GM vehicles, people were getting screwed with huge bills due...

I think you are wrong about that, and, if this is a relevant factor in your decision, I encourage you to research this issue very carefully before being pretty sure you can write it off as a business expense.

I don't understand this.  If there are (hypothetical numbers) 36 months left, $900 a month, he is going to pay the lessor 36 x $900 = $32,400 (paying off the lease upfront), and then he is going to write you a check each month for $900, and then you are going to reimburse him for $900?  Why all these unnecessary and complicated steps?

Seventeen months on the lease.

He prepays off the balance of the lease, approximately $12,750.

By prepaying it he has assumed the entire risk of the transaction. Remember, this is a favor to him since he needs a larger vehicle.

He will include that $750 a month as part of my compensation, and I will kick it back to him but be responsible for the taxes on that additional compensation.

The benefit for me is I am guaranteed X every month. On good months I will get more, call it X + Y. Y is variable, it could be $1,000 or it could be $4,000, or if its not a good month I might just get my guaranteed X. With this deal I am guaranteed X plus the value of the lease and insurance. For these purposes we will value that at $900. So, if we had a good month and I was getting X plus $2,000 I would instead get X plus $1,100 and the lease and insurance, but no matter what, I will get X plus lease and insurance regardless of how much business comes in. Since my additional monthly compensation is variable and solely at his discretion, this does guarantee additional compensation every month of the lease.

By him prepaying the lease, he knows that money is gone. If the business folds for some reason, and he isn't cutting me a check, he gets nothing back and I still have the vehicle in my name with a paid in full lease. Since this isn't a lease I would have sought out myself, I think he offered to prepay it as an incentive for me to accept the proposition. I wouldn't want to put the lease in my name and have payments due each month that I was contractually obligated to make, and he acknowledged as much.

This sounds like a lot of poor and complicated decisions. If i have to spend a lot of time figuring out the minutiae then i pass.

Put that focus into something that betters your life or career.

And it hardly sounds like a favor to him.

It’s kind of confusing, as he’s taking a personally leased vehicle for personal use, and going to transfer the lease to you, and pay the entire lease upfront as part of your compensation package, personally, not as a business expense/liability.

Why not just trade the lease in for the new vehicle he’s going to lease?

I’m assuming there are penalties if he does that, I don’t know.

That’s why I’m asking for your insight folks.

I am really confused here as well.  Why is it doing him a favor.  If he wants out of the lease, he can pay off the balance, and turn it in.  Instead, he is going to pay off the balance and allow you to use the vehicle?  Something sounds really strange here, unless he just figures, If I am going to pay for this vehicle, someone (YOU) might as well get use of it...or is there a business write-off involved.

I really don't see a downside here - but the whole "transferring the lease to you" part just seems strange.  Why not list it as a business lease vehicle, and allow you as a contract employee to use the car like a corporate lease?

I think OP is going to be kicking back that lease payment under the table.

This benefits the employer in several ways. I am assuming he has the vehicle leased in the business name. He pays it off as a business expense. He gets to deduct this from his income.

He lets you use car and pays you the amount of the lease payments and gets to deduct that as a payroll expense.

You give him (personally) the amount of the lease payments and he gets that tax free in his pocket.

Not saying it Is a bad deal for you as you are basically getting free use of the car, less taxes, but it also works out good for him too.

I’m assuming it’s a personal lease as it’s his wife’s car. They have a third child on the way, and the X5 is not big enough for their needs. It could be a business lease.

I think you might have nailed it though.

I would tend to agree!  Sounds like a scam.

Maybe have him Lease it in the company name.

Then allow you to drive it as a company vehicle / personal vehicle.

That way you have no insurance etc. worries.

You can then establish a percentage  ratio of biz vs personal usage and use the federal mileage rate to establish your auto allowance for the year.

There is little reason to do a personal lease if you own a business.  Unless there are other partners.  My companies own all of my vehicles.

But in most cases,  someone that leases vehicles is either bad with finances or so wealthy it doesn't even matter and they do it for convenience.

Leasing is a very expensive way to drive.  Basically you're taking all of the costs of owning a vehicle then adding profit, marketing,  and overhead to it.

And it isn't technically a loan so truth in lending doesn't apply.  Most people can't conjure the math to figure out the actual "interest rate".

Fella,

It sounds like he is going to be commuting to work in the car.  You cannot deduct the cost of the lease in that situation.  If your business owns the lease and pays it, then the personal use is taxable compensation to you - on which you must pay taxes.  Every mile you drive for personal use is taxable.

Personal use of a company car is a taxable fringe benefit. The IRS treats it as wages.

Commuting, running errands, allowing a family member to use the car, and taking a vacation in the car are all taxable as wages.

PS - if you do not track mileage and differentiate between personal and business use, guess what?  It is ALL taxable.

"For a leased vehicle, use the automobile lease valuation rule. Determine the fair market value of the vehicle on the first day an employee uses it for personal purposes. Look up the annual lease value in IRS Publication 15-B. Multiply the annual lease value by the percentage of time the employee used that car for personal purposes, relative to his use of it for business purposes."

https://smallbusiness.chron.com/irs-taxable-fringe-benefits-company-car-15565.html

In your situation, since your company owns all of your vehicles, I hope you are tracking mileage, keeping good records, and paying taxes on your personal use (such as driving to work or to the grocery tore) so this does not come back to bite you.

From the same link:

"Cents per Mile Rule
By the cents per mile rule, each personal mile driven by an employee is considered 54.5 cents in wages, as of 2018. If the business does not provide the fuel for the vehicle, deduct 5.5 cents per mile.

Commuting Rule
By the commuting rule, each direction of an employee's commute using a business vehicle is considered $1.50 in wages."

Obviously, if your commute is more than three miles, you come out ahead using the Commuting Rule.

I agree.

But real world application, almost no one does that. Ive been audited before and it never came up in any detail.

I’m kind confused about this situation, but if it essentially boils down to where your boss is paying for the vehicle even if it’s in your name, I don’t think either of you can deduct it.  You can’t deduct it, because you’re not paying it.  He can’t deduct it, because it’s not his expense.

Your moving from salaried to 1099?   This does create the ability to itemize but you'll be considered self employed.  Talk to you accountant about the additional taxes you will have to pay.  Right now your boss is probably matching FICA which you may have to pick up if going to a 1099.  My accountant referred to it as the self employment tax.  Not a deal breaker but something to consider.  Do you have health insurance now and would you lose that coverage?  Individual health is very steep.

ETA:  The biggest benefit to your boss would probably be your moving to a 1099.  No matching FICA, lower or no workers comp depending on if there are other employees hourly or salary.

ETA 2:  I used to claim all the miles on my Expedition but had my wife's car as a second auto available for use, my accountant always asked if there was another auto available so I'm sure it was a question on the 1040 or one of the schedules.