If your business means you need to regularly get behind the wheel and clock up the miles on the road, you might come to something of a crossroads – do you buy a car for your business, or do you lease one?
There are pros and cons for both options, but ultimately one will be better for your specific business circumstances.
In this post, we’ll take you through the various benefits and pitfalls associated with either buying or leasing a car for business, and answer some frequently asked questions.
Leasing or buying a car for business? Here’s what you need to know
Before we discuss the differences between buying and leasing, it’s important to know that in order to receive the tax benefits for your business, you must be able to prove your car is being used for business purposes at least 50% of the time.
And when it comes to acquiring the vehicle, you need to think carefully about the short and long-term financial consequences.
Typically, when you buy a car for business, it makes sense to finance it with a loan. This saves you scrambling to find a lump sum of cash to pay for the vehicle outright. However, the downside to taking on a loan is that the car’s value will depreciate, while the loan amount will stay the same. And the reduction in value can happen faster if the car is in an accident and suffers significant damage.
Leasing a car, on the other hand, means you can avoid such a scenario. Any residual value at the end of the lease agreement can actually lower the cost. However, you generally won’t receive the same level of tax benefits that come with ownership (more on this below).
The 5 Key Differences Between Buying and Leasing
Here are some of the main differences between buying and leasing a vehicle for your business:
1. Up-front Costs
Whether you choose buy or lease, you’ll need to deal with an up-front cost, be it a down payment or a deposit. Take the time to assess which option is best for your business and your cash flow.
If your business owns the vehicle, you can reduce your tax liabilities via depreciation deductions as the value of the car falls year after year. This isn’t available with leased vehicles.
3. Minor Damage
As you drive from sales meetings to suppliers – and everywhere in between – the car will naturally succumb to wear and tear. Tires will need to be changed, the body might get scraped or dented, bulbs can burn out, etc. If you own the car, this will require further investment to fix, and can subsequently reduce its resale value. And if you lease it, you may be liable for additional charges if the damage is considered ‘excessive’ by the rental company.
The good news is, you can deduct mileage expenses for both purchased and leased business vehicles. That being said, if you plan on racking up the miles on business trips, you should exercise some caution and common sense. High mileage can impact the resale value of a vehicle owned by the business, while lease agreements often have mileage limits, meaning you’ll incur a penalty for exceeding the limit.
5. End of Agreement
At the end of the finance agreement, your business will own the car outright. This means you’ll have an asset that you can retain or sell.
With the leased vehicle, you can either return it for an up-to-date model (or just turn it in), or you can come to an agreement to buy the car.
Some Frequently Asked Questions
Here are some of the most common questions we’re asked about buying vs. leasing a business vehicle:
What if I don’t have the cash?
If you’re worried about your cash flow situation, then purchasing a vehicle isn’t the best idea. However, if you shop around, you should be able to find a lease that does not require a down payment, therefore putting you on the road faster, and without the immediate financial pressure.
Does it matter who’s driving the car?
When it comes to mileage, it does in fact matter who’s driving the car. If it’s you, then you’ll have control over when you drive the car, and how far. However, if it’s one of your employees, it can become difficult to monitor business use versus personal use. This means the mileage limits associated with leases become a more pressing issue than if the business owns the vehicle.
Do business vehicle leases include maintenance costs?
Yes, but it often costs extra. That being said, it’s a worthwhile investment, as it saves you from dealing with the routine maintenance over and above the cost of the lease.
What do I do with the car at the end of the lease?
If you’re using a loan to buy a car, once you’ve paid it back, you own it. You can then do whatever you want with the vehicle – keep it, sell it, trade it in. At the end of a lease, you return the vehicle and receive another one, or you can come to an agreement to purchase the car outright.
What are the tax benefits of leased and purchased business vehicles?
When leasing a car, the payments are tax deductible and based on how much you use the car for business. As mentioned, this needs to be at least 50 percent.
If you choose to purchase the car, the interest on the loan is deductible, and you’ll also be able to take advantage of depreciation deductions.
Buying vs. Leasing: How to choose?
When it comes to choosing between buying and leasing a vehicle for your business, you need to consider mileage, cash flow, tax benefits, and other factors specific to your circumstances. And we can help you do just that. We’ll cut through the often complicated and confusing information and help you arrive at the best decision for your business.
To speak with one of our dedicated business advisers, contact us today.