Cash and Tax Considerations Affect Whether You Should Buy or Lease
It’s time to buy a new company vehicle – should you buy or lease that car, truck or van? There are a few different factors to consider in deciding what’s best for you.
Buying a car means a chunk of cash up front. If you’re buying it outright, it’s healthy five figures (unless you’re buying the neighbor kid’s 20-year-old Kia). Even with a loan, you’ll need to lay out a pretty big down payment to close the deal.
On the other hand, leasing means putting down a deposit and the first month’s payment. Chances are that will be less than what you need to pay when you take out a vehicle loan. And when it comes to monthly out-of-pocket, lease payments are usually lower than loan payments.
So, if cash flow is a concern for your business, you might want to consider leasing. But if cash isn’t a problem, and you want to keep your company’s credit open, buying might be your best option.
You can deduct some or all of your lease payments as an expense on your taxes. But if you own the vehicle, you get to take the depreciation expense. And if you use it more than 50 percent for business, you can take accelerated depreciation. That let’s you deduct more of the car’s expense the first year you own it, which can whittle down your tax bill in a hurry.
For tax purposes, you can track the actual costs of using your vehicle, or use the standard mileage rates. With a car you own, you can change what method you use after the first year. But with a leased vehicle, you’re locked into your first choice.
How much will you drive it? Leased vehicles often have extra fees if you put more than 10,000 or 12,000 miles a year on them. If you drive a car you own a ton, you’ll probably lower the resale value if you decide to sell it. It’s the same if you’re pretty rough on a vehicle. Lease companies, though, will charge you for “excessive wear and tear” for that worn upholstery and dings and dents.
How long will you keep it? If you like getting a new vehicle every three or four years, leasing is for you. But if you want to keep the car for years, buying is the way to go. Plus you can sell it at any time, and customize it the way you want. When the contract is up on your leased vehicle, there is a residual cost that you can pay if you want to own the car for good. But that residual cost could easily be more than the appraised value of the car.
Ask Your Accountant
So, should you buy or lease your company vehicle? To generalize, you can assume that leasing a vehicle is cheaper in the short-term, but buying will decrease costs over the long haul. But to be sure, check in with your friendly neighborhood accountant. They will look at your situation and help you decide what’s best for you.
This IRS article details some of the rules for business use of a vehicle.
The National Automobile Dealers Associations (NADA) shares their guide to vehicle values.
Check out our blog post on how to track your mileage.
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