Is It Better to Buy or Lease a Car for Business?
Are you a small business owner who needs a car for work? Trying to decide if you should lease or purchase the car? Do you know the advantages and disadvantages of leasing vs buying a car for business purposes?
The answer isn’t the same for everyone. There are a number of things to take into consideration for this decision.
Are there tax benefits of leasing a car for business? How many miles will you drive the car each year? How often will you need to replace it? Should you lease with an option to buy the car after?
If you’re considering leasing or buying a vehicle for business use, then keep reading. Learn more about the advantages and disadvantages to decide which of these options is right for you.
Advantages of Buying a Car vs Leasing for Business
If you choose to purchase a car, you own it. It is an asset that you can sell or trade at any time in the future. You could even use it as collateral for a loan if you need to.
There are no restrictions for how long you must keep the car or how many miles you can drive it each year. In addition, you have more negotiating power when you’re buying a car. You can negotiate the sales price or financing options.
There are also a few more tax advantages to owning versus leasing a vehicle. While there may be more upfront costs to purchasing, often the tax deductions over the course of owning the car counteract the final overall costs.
Advantages of Leasing vs Buying a Car for Business
On the other hand, if you’re a business leasing a car, you won’t need a large initial payment upfront. You can often get a newer, nicer vehicle for lower monthly payments. Plus, most leased vehicles include a full manufacturer’s warranty.
Upgrading to a newer vehicle, covered by a full warranty might be especially attractive for a business that is car-dependent. For instance, if you’re a landscaping company or a moving company it might be appealing to know your trucks have the newest upgrades and safety equipment.
Leases aren’t affected by depreciation over the life of the car. In the first year alone, most cars lose 20%-30% of their value and within five years a car loses 60% of their value. So if you’re leasing a car, your capital isn’t tied up in a depreciating asset.
How Does a Business Car Lease vs Purchase Work?
For the most part, purchasing a car is fairly straightforward, especially if you already have the financing. You go to the dealership and pick out a car. You make arrangements for the title and insurance. Then, you pay the dealer and drive off the lot.
Leasing a car is a little more involved because, in essence, you are renting the vehicle from the dealer. You need to agree to their terms and conditions, including how many miles you’re allowed to drive the car. If you go over the allotment specified you may have to pay additional fees at the end of your lease.
One aspect of leasing a vehicle that many people aren’t aware of is that often only one person can be designated to drive it. While this may not be an issue if you’re a sole proprietor, this can be cumbersome for a business with multiple employees.
When you return a leased vehicle, it needs to be in good if not excellent condition. Over the time of your lease, you might need to pay more for maintenance and repair. You cannot ignore minor wear and tear on a leased car as when you own it.
At the end of the lease term, you often have the option to purchase the vehicle or return it. Returning it may be a good option if you want to change the make and model of your car. Or, if you prefer new cars with full warranties.
Tax Advantages of Buying vs Leasing a Car for Business
There are tax advantages of having a car for your business. You can usually deduct parking and toll fees, gas or mileage, and maintenance/repair costs for business vehicles regardless if it’s leased or purchased. But they are some slight differences beyond that.
If you’re purchasing a business car, you can often claim the entire cost of the loan. However, if you’re leasing a vehicle, your deductions are reduced by a “lease inclusion amount” determined by the IRS. The lease inclusion amount is prorated for the number of days it’s leased in the tax year and can also be adjusted in like to its business use percentage.
You’re also allowed to deduct the depreciation value on a purchased car for the first five years you own it. This can allow for big savings on your taxes against the cost of the car.
There is no option for deduction of the depreciation on leases. However, if you expect to trade in or sell a car before it’s five-years-old, then it may be advantageous to lease the car and not incur the depreciation.
When you return a leased vehicle there is no gain or loss on your business taxes. There is however if you sell an owned car.
Deciding to Lease or Buy
Making a decision about leasing vs buying a car for business is dependent on a number of factors. While it may be tempting to take advantage of lower upfront and monthly fees, business owners should also consider the long-term financial ramifications.
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