Should Small Businesses Buy or Lease Vehicles
When your small business needs a company car, it's a great sign of growth and potential. The next task is deciding whether to buy or lease your company vehicle. We'll help you decide on the best solution for your business by discussing all the factors involved.
Buying vs. Leasing a Car for Business: What's the Difference
There are several factors you should consider when deciding on buying or leasing your company car. Using these factors, compare how buying versus leasing a company car would affect your small business financially and practically. Read on to learn more about leasing vs. buying a business vehicle.
Car Payments
When buying or leasing a business vehicle, a sizeable down payment can give you a financial advantage by lowering your monthly payment. However, leasing a car may be a wiser option if you don't have enough cash for a large down payment. Car lease contracts typically require less money for a down payment than car sales contracts. Some leasing contracts don't require any down payment at all. Also, your lease payment will likely be less than a car finance payment when purchasing a car outright.
On the other hand, a big advantage of buying your company car is you won't have any more monthly payments after you pay off your car purchase. At that point, you'll only have to pay for gas, regular maintenance, and insurance. You can figure out how much your potential car loan payments will be with our online loan calculator.
Vehicle Mileage
Mileage is essential in deciding whether to lease or buy a company car. The major difference between the two options is most car leases have mileage limits, and car purchase contracts do not. So, if you plan to use the company car for frequent long trips like from Gary to South Bend, leasing a company car may not be your best choice.
Since a purchased company car does not have an annual mileage limit, you can drive it as far as your budget will allow or use it any way you want. Also, a leased company car may have restrictions concerning the areas you can drive it in.
Tax Considerations
The IRS allows tax benefits for businesses by deducting company vehicle expenses through the standard rate deduction or the actual expense deduction[1]. By purchasing your company car, you can switch between these deduction options from year to year. However, you must stick with your original choice when leasing. This tax deduction restriction for a leased car may become a disadvantage if your business miles vary drastically from year to year.
- When you buy your company car, the IRS allows your business to do the following.
- Deduct state and local taxes (you must pay the taxes upfront)
- Use IRS Section 179 to deduct the purchase price of qualified vehicles
- Use your company car as a depreciable property[2]
- Take advantage of tax breaks for purchased electric and hybrid vehicles[3]
If you lease your company car, the leasing company will include your sales taxes in the monthly lease payments. Also, by using the actual expense deduction on your federal tax returns, you can deduct a portion or all the cost of your monthly payments on a standard lease. The amount you can deduct depends on how much you use the company car for business.
Car Maintenance
Most lease contracts include the manufacturer's new car warranty for your company car[4]. For this reason, you won't have to worry about expensive repairs during the lease period. The contracts also typically cover routine maintenance and repairs, but you may have to pay extra charges if you return a leased company car with unusual wear and tear.
Although a business vehicle purchase agreement may include three years of free service, you are responsible for the maintenance expense afterward. This drop in coverage happens when your vehicle typically requires more maintenance.
Customization for Your Small Business
Since you can't usually customize a leased vehicle, you will likely need to buy your company car if you intend to customize it to fit your brand or paint it Notre Dame blue and gold. Car lessors expect you to return the vehicle in its original condition, except for standard wear and use.
Should You Buy or Lease Your Business Vehicle
Your decision to buy or lease your company car depends heavily on your budget, intended vehicle use, and the tax implications. Considering the factors we've covered, both options give you clear advantages and disadvantages for each one.
With this information in mind, it may be better for you to buy your company car for the following reasons.
- You have enough money from savings or a money market account to cover the initial costs of a substantial down payment (around 20%), upfront sales taxes, and routine maintenance costs.
- You want to reduce long-term costs once you pay off the car and decrease your tax burden with depreciation.
- You plan to put more miles on your company car than the lease agreements allow.
- You intend to customize the vehicle or put it through more abuse than a car typically receives.
Considering the same factors, you may be better off leasing for the following reasons.
- You don't have enough money for a significant down payment or upfront taxes.
- You prefer not to pay interest and maintenance costs on your company car.
- You are comfortable with the mileage restrictions and the condition requirements.
- You can do without customizing the vehicle.
- You prefer to avoid the hassle of selling or disposing of your company car at the end of its useful life.
Car Leasing vs. Buying: Your Ultimate Decision
These details should help you understand the important factors concerning buying vs. leasing a company car. At this point, you should have enough information to determine the best option for your budget, business transportation needs, and tax preferences. Regardless of your decision, you can improve your buying or leasing terms by saving money for a substantial down payment with a savings account. You can reach that goal by starting your journey with Centier Bank today!
This is intended to be informational only and not tax or legal advice.
Sources
[1] https://www.irs.gov/taxtopics/tc510
[3] https://www.irs.gov/credits-deductions/clean-vehicle-and-energy-credits
[4] https://www.consumeraffairs.com/automotive/what-is-a-manufacturers-warranty.html