Is it Better to Lease or Buy a Car for Business Use?
If you are considering car leasing for your business, you may be wondering if it is better to lease or buy. Here are some factors to consider:
Loan Payments vs. Lease Payments
Buying a car means a loan for a specific amount which you will have to pay back even if the value of the car goes below the amount of the loan. This can happen if the car is in an accident, for example.
With car leasing, the residual value at the end of the lease can lower the lease cost, and if you get a closed lease you can walk away without penalty.
IMPORTANT: To get tax benefits for business use you must be able to prove the car is being driven at least 50% of the time for business purposes.
Leasing vs. Buying a Car for Business - An Analysis
Here are some comparisons between leasing and buying a business vehicle:
Ownership: This is different for businesses, because of the tax benefits of ownership. A leased car typically doesn't get you any tax benefits (depreciation), while owning the car can give you depreciation deductions.
Initial costs: Up-front costs for leasing and buying are different (down payment vs. first month/security deposit), so you would need to consider these on a case-by-case basis.
Mileage: You can deduct mileage expenses for both leased and purchased vehicles. Higher mileage for a car you own can reduce its resale value.
Leased cars have mileage limits, and you can be penalized for going over the limit.
Wear and tear: On a car you own, excessive wear and tear (all those little dings in the body) can reduce resale value. With a rental car, you may be charged if the wear and tear is "excessive."
End of term: With a purchased car, you can do what you want.
With a leased car, you decide between buying the car or turning it in. Of course, the dealer may give you a deal to lease another one.
Questions to Ask Before You Decide
Do you have the cash for a down payment?
If you are concerned about putting up cash from your business for a down payment, consider a lease. Some leases do not require a down payment, but most car loans do.
Who will be driving the car?
Whether you lease or buy also may depend upon who will be driving the car - you as the business owner or one of your employees. As an owner, you have more control over the mileage. If the car is being driven by an employee, you may not be able to control personal use of the car. In the case of an employee driver, it might be better to buy the car rather than lease it.
How many miles will you be driving each year?
Take some time to determine how much your business vehicle will be driven. Car leasing terms include a limit on mileage and you will have to pay more for the lease if you want additional miles covered. Car purchases, on the other hand, do not have a limit on miles, but remember that the car will depreciate faster if it has more miles on it.
Should you pay the additional cost of maintenance?
If you are going to do car leasing for your business vehicles, spend the extra money for routine maintenance, including oil changes and tire rotations.
Many leases require maintenance. Even if you want to purchase one or more cars for your business, maintenance is still important.
What do you want to do with the car at the end of the lease?
When you have paid back a car loan, you still own the vehicle and you can keep it, sell it to an employee, or use it as a trade-in. At the end of a car lease, you give back the leased vehicle and get another one, or you can negotiate a purchase with the dealer.
How do taxes and depreciation work for a leased car?
Car leasing payments are tax deductible, based on percentage use of car for business. Only the interest on the car loan is deductible as a business expense. Both leased vehicles and owned vehicles may be eligible for depreciation, including special accelerated depreciation, depending upon the type of car and other factors.
Check with your tax adviser for more information on depreciation.
Whether you lease or buy a car for your business depends on cash flow, mileage, and other issues that are specific to your business. Spend the time to research both options before making a decision.