You have a business that could benefit from having vehicles specifically for work purposes; however, you’re unsure whether you should buy the vehicle outright or lease it for a period. This can be a tough decision with many factors that should be taken into consideration.
Many small business owners use this situation as an opportunity to purchase a new vehicle through their company rather than having to use their personal car. This allows the owner to reap the benefits in two areas. First, if s/he uses the car for personal and business use, the individual has to recognize the car as taxable income and the company may be able to deduct expenses from the vehicle as a business use.
When making the decision to purchase versus leasing, part of the decision needs to hinge on what the tax consequences for the vehicle will be. In addition, you must take into consideration:
- How many miles you will need to drive per year
- How often you’ll want or need to replace the vehicle
- How much the monthly charges will be
- The cost of the required down payment
- How much the buyout will cost at the end of the lease
Total cost tends to be the major deciding factor as to whether you will buy or lease a vehicle. Lease payments typically include interest. That said these payments are still often less than finance payments on the purchase of a vehicle. This means that you would be able to afford a higher-end car. While this can save you some money upfront, there are hidden costs associated if your vehicle will be used to travel long distances. Typically, leases give a mileage allowance of 10,000 and 12,000 miles per year—any mileage above this will incur additional charges.
Vehicles can either be purchased or returned to the dealer at the end of the lease term; however, if you’re planning to purchase, it is to your advantage to do so upfront since the total cost of the vehicle over its life will be less.
Unlike a leased vehicle, owners can deduct the business portion of a car’s annual depreciation. Moreover, since the established depreciable life for a passenger vehicle is five years, a lease-to-own vehicle owner would miss much of this tax break—unless you’re planning to trade in or sell the car before the five years are up.
Leased vehicles do have deduction possibilities. You can deduct the monthly payments; however, the amount is reduced by a lease inclusion amount. The IRS publishes a table where you can find the annual inclusion based on fair market values of vehicles. This inclusion is prorated the number of day of the lease in terms of the tax year and then is reduced to only the business use percentage portion.
Having the ability to lease a fancy vehicle can be very tempting to business owners; however, you need to consider how it will affect your bottom line. In the end, the answer to whether to buy or lease depends on you and your business’s individual circumstance. By weighing the pros and cons on either side of the debate, you can come to the decision that works best for you. Click here, here and here to learn more about leasing vs. buying.