Capital for the LHPH Industry

Creating financial flexibility one dealer at a time

Federal Income Tax Advantage of Lease-Here, Pay-Here

Trevor Watson | May 14, 2020

As opposed to a Buy-Here, Pay-Here (BHPH) model, with a Lease-Here, Pay-Here (LHPH) program, the dealer becomes the lessor with ownership of the assets (the vehicles) 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, sometimes to zero, depending on the size of their portfolio. While this has always been a compelling reason to migrate to LHPH, the new tax law in 2018 served to compound this benefit.

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 dramatically increased the tax savings opportunity for LHPH for the next decade.

As an example of just how impactful this can be; imagine you start leasing 15 cars a month for the next twelve months and the average Actual Cash Value (ACV) of the vehicles you lease is $7,000.  If you chose to take the Bonus Depreciation on your taxes for that year, you would have the option to depreciate all 180 vehicles in your portfolio the full ACV value of $7,000 each.  This results in a total deduction of $1,260,000 against whatever profits you made from your dealership that year.  That represents an incredible opportunity for the dealer principal to defer tax liability, even in the first year of operation.

Alternatively, lessors can still follow the more traditional straight-line depreciation and depreciate the value of the vehicles over the life of the lease and spread that impact over time, if that is what your CPA recommends.  You may not need $1.2MM in depreciation year one when $250,000, or 20% of the $1.2MM, fits your tax needs better and you can save the rest of the depreciation for future years.  Of course, if you continue to build your portfolio, you will have even more depreciation to work with in the following years.  Often, the depreciation piece even makes dealers who do not reside in “pay-as-you-go” states opt for LHPH over BHPH once they pencil it out.

Either way, there are strong advantages to a LHPH program for tax purposes. 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.

Learn more about all of the benefits of LHPH by downloading our E-Book here!

New call-to-action

We believe in challenging the status quo of subprime lending and
value our dealers as partners.
Contact Us Today!
Get access to our FREE! e-book and learn how to launch a
Lease Here Pay Here program at your dealership.
Get my FREE E-Book