When it comes to picking your next business vehicle, you can buy it or lease it. Read on to find out the benefits and drawbacks of buying vs. leasing a business car.
What should I consider when leasing vs. buying a car for business?
Consider the following criteria when deciding whether to buy or lease a vehicle for business:
- How Are You Using It: Consider how and how often you plan to use your business vehicle. Are you using it every day or occasionally? Decide whether you’d benefit from owning it or temporarily leasing a car and trading or retaining it once the lease expires. Your lease contract would need to have a buy-out option for you to retain the car after the lease expires.
- Cost: Find out the total cost of leasing a car for the full lease term. This includes the initial down payment plus the monthly lease payment and any mandatory maintenance costs. Compare this cost with the down payment plus monthly car loan payments that would come with buying a car.
- Mileage: Estimate how many miles you plan to put on your business vehicle per year. Many lease contracts impose an excess mileage fee over a certain limit. The fee is usually imposed on a cents-per-mile basis.
Can you write off lease payments on taxes?
You can deduct lease payments to the extent your car was used for legitimate business purposes and not personal use.
Let’s say your monthly lease payment was $400 per month ($4,800 per year) and the business use percentage was 80 percent. You can write off $3,840 (0.8*4,800). Yet, there are some exceptions.
Most notably, if you lease a luxury car (measured by high fair market value), you will have to reduce your deduction by a lease inclusion amount. Find out more about the lease inclusion amount in IRS Publication 463, “Leasing a Car.”
How can I lease a car for my business?
Select a type of car that will suit your needs. Determine which features you need at minimum, focusing on safety and fuel economy. Head to your nearest dealership with a business division and speak with a representative who has handled business leases.
Test drive several cars that meet the criteria you laid out earlier. Then, pick a make and model that meets those needs and negotiate the terms of the lease, including costs and duration. If you are confident you can comply with the terms, complete a lease application.
Once the application is approved, carefully read over and sign the lease contract.
Pros and cons of leasing vs. buying a car
Leasing is preferable to buying when:
- You plan on putting low mileage on the car. Otherwise, you could wind up paying a hefty fee for exceeding the mileage limit set forth in the lease contract.
- You need a car on a short-term basis. Leasing over a long period of time could cost you more than buying a vehicle.
- The business vehicle needs upgrades more frequently. Leasing a car means you don’t have to make a permanent commitment to a given make or model.
- You can afford the lease but can’t afford to buy the vehicle.
- You can keep up with regular maintenance. A lease contract can impose wear-and-tear fees if you don’t keep the car in shipshape condition.
- Your credit prevents you from getting a low-risk car loan.
Buying is preferable to leasing when:
- You drive extensively for business. There’s no fee for excessive mileage on a car you own.
- You want to own your vehicle and be in control of what you do with it and how you take care of it.
- You’re committed to a given make and model and don’t need to upgrade your vehicle on a frequent basis.
- You have the funds to purchase a vehicle outright or via monthly payments. Owning the car also makes you eligible for the vehicle depreciation deduction that leasing isn’t eligible for.
- You have good credit and can obtain a low-risk car loan.
MileIQ’s blog does not constitute professional tax advice. You should contact your own tax professional to discuss your situation.