If you own the type of business that requires transportation, each year you may be questioning whether it’s more cost efficient to buy or lease a car.
Below are pros and cons for each side.
- Down Payment. If putting a large sum of money down on a car is a stress point for your business, consider a lease. Some leasing companies do not require money down.
- Loan vs. Lease. With a loan, you are required to make monthly payments, even when the value of the car depreciates below current market value. With a lease, you are making monthly payments, but only for the residual value of the car.
- Mileage. Take time to determine how many miles you need to drive the car each year. Leases allow for a certain amount of mileage, which you then pay additional for when you exceed that number. While buying a car does not require as much of a mileage concern. Remember, the more miles the vehicle has on it, the faster it depreciates.
- Maintenance. When leasing a car, many companies require a maintenance schedule (and records) be executed for the vehicle, e.g., oil changes and tire rotation. Some leasing companies will waive the fee for this up to a certain amount. However, be sure to budget the service costs into the monthly payment so you are not shocked when service needs to be done.
- Damages. Because leased vehicles are more like renting than buying, when you are ready to return the leased vehicle a rigorous inspection process takes place. Every ding, scratch, or dent may be assessed and be cause for additional money due upon return. Learn more about vehicle leasing insurance needs.
- Insurance Needs. When leasing a car, if the vehicle is “totaled,” and your insurance does not cover the cost of the vehicle, you may have to pay the difference. That’s why it’s important to purchase GAP Insurance in addition to comprehensive coverage for the leased vehicle.
- Taxes and Depreciation. Lease payments are tax deductible, based on percentage use of car for business. Only the interest on a car loan is deductible as a business expense. When it comes to depreciation, both a leased vehicle and an owned vehicle are eligible, including special, accelerated depreciation. According to the Business Owners Toolkit, “When business use of a leased vehicle is less than 100 percent, the tax deduction is scaled down in proportion to the personal use.”
- When it’s all said and done. When you pay off a purchased vehicle, you can sell it, use it as a down payment on another vehicle, or keep it. However, with a lease, you may return the car and lease another, or you may buy the car for the residual value of the vehicle as stated in the contract.
When considering buying or leasing a vehicle, do your homework. Put pen to paper and decide what is the best plan as far as cash flow, depreciation, and tax benefits for your business. Speak with your tax accountant or financial advisor about the best plan for your business.
Contact us if you have questions about company car use, leasing or buying a business vehicle, and/or the tax implications for your business.