Should You Purchase or Lease a New Business Vehicle?
When it comes time to get a new business vehicle, you might wonder whether it’s more advantageous to lease or purchase. Unfortunately, the answer isn’t always cut-and-dried. Every business has unique vehicle-use needs, but we can offer some considerations that might help you make the right choice.
Generally, if you don’t intend to put a lot of miles on the car, you expect to use it for three years or less, and you don’t want to have a huge outlay of cash up front, a lease might be a good way to go.
However, purchasing is likely the better choice if you want to keep the car for five years or more and have the budget.
So, let’s discuss the pros and cons of lease vs. buy and see how we fare. Read on to learn how to choose the best option for your business needs.
Is Leasing or Buying a Business Car the Better Choice for You?
Here are a few questions to consider before we get started.
1. How do you intend to use the car?
When you lease a car for business use, the leasing company may restrict how much and where you drive it. For example, some may limit your driving range to within the state. Virtually all leases have mileage limits, too, so if you intend to drive a lot, this could be costly as you’ll have to pay mileage fees when you turn the car in.
Mileage allowances vary but can be anywhere from 10,000 to 15,000 miles per year. If the car is intended for sales or other fieldwork, you might want to think about what that would entail. Any overage is charged per mile, which can add up quickly.
2. How much can you put down on the car?
Leases generally require a down payment at signing. When you buy and finance a car, you may be able to get it for no money down, but the more money you can pay up front, the lower your payments. Similarly, the less money you put down, the higher your payments will be. Though these two situations may sound alike, the lease payment will likely be less than your purchase financing.
What if I’m Self-Employed?
For self-employed workers, independent contractors, or solopreneurs, you can deduct either business-related vehicle expenses, such as business-use fuel, parking, tolls, lease fees, etc., OR mileage fees, but not both. The mileage rate for 2024 is 67 cents per mile.
Choose the method that suits you best. The caveat is that if you have a leased vehicle, you will choose one method and stick to it for the duration of your lease. If you own the car, you can switch to the other method in subsequent years if it becomes more favorable.
Leasing a Business Car: Pros and Cons
Like all business decisions, weighing the upsides and downs before you take the plunge is essential.
The same deduction rules apply as described above but there are some additional considerations, especially where taxes are concerned.
Because you do not own a leased car, you can’t take a depreciation deduction. You can, however, deduct the business portion of your payments even if the vehicle is in your name (as opposed to the business).
If you intend to lease a “luxury” car, the amount you can write off is limited, as would be the depreciation if you bought it. The more expensive the vehicle, the less you can write off. Mind you, it’s a relatively small margin. So, if you’re set on a specific car, it’s likely not a make-or-break situation.
As the price of the car increases, leasing typically becomes more favorable. Leasing costs could also be lower for high-value cars because the depreciation is less, and the vehicle will still have a high market value when turned in.
Lastly, when you return the car at the end of the lease, there is no taxable gain or loss, as there would be when you sell a vehicle you own. If you owned the car, gains attributed to depreciation would be taxed as income.
Business car leasing pros:
· No maintenance fees (sometimes). Repairs and maintenance are often covered under the terms of your lease.
· Easy disposition. No need to sell the car or worry about capital gains. Once the lease is done, simply turn it in.
Business car leasing cons:
· Mileage limits. Be realistic about how many business miles you intend to put on the car. At the end of the lease, you will be charged for overage, which can be between 18 and 25 cents per mile.
· No customization. Leased cars are typically off-the-lot and can’t be built out with any add-ons.
· Read the contract. Lease agreements can be complicated and may include charges for early termination, excessive wear, or failure to maintain.
You may have an option to buy the car at the end of the lease. If you have a purchase option, that amount will represent the vehicle’s market value.
Purchasing a Business Car: Pros and Cons
Buying a business car might be more advantageous for some business owners. Here are some of the pros:
· You own it. You can drive it wherever and as much as you want.
· You can customize it to your liking.
· Depreciation is a business expense you can’t take on a leased car.
· Hybrid cars and EVs might be eligible for additional tax breaks.
The cons of buying a business car outright include:
· Higher costs at purchase and interest on monthly payments.
· Maintenance and repair costs are out of pocket.
· Dispensation. You’ll be responsible for selling or disposing of the car and may need to pay taxes on any gains from the sale.
Buy or Lease? Final Thoughts
Now that you’re armed with the information you need to make a qualified decision, how will you choose?
Leasing might be a better option if:
· You’re a small company or self-employed worker on a budget.
· You don’t want to worry too much about vehicle maintenance.
· You won’t be driving more than the allotted mileage.
However, purchasing might be the best way to go if the business car will likely see a lot of mileage, wear, and tear, or you need specific customizations or features.
Set up a call today to learn more about how to leverage business vehicle expenses to reduce your taxes.