When you drive a lot for your small business, you may decide to get a company car. That can be very beneficial!
However, there’s one more thing to consider; should you lease or buy? The wrong decision can mean thousands of dollars down the drain. How do you make the right choice?
At CSI Accounting & Payroll, we’ve worked with small business taxes for over 50 years. That means we’ve talked to thousands of small business owners who want to know these things about buying or leasing company cars:
- What are the pros and cons of leasing a company car?
- What are the pros and cons of buying a company car?
- What are the main factors that will help me decide between buying or leasing?
Leasing Pros and Cons
Let’s talk about some of the factors to consider when you’re thinking of leasing a company vehicle.
Leasing Pros
When you lease a company car, it’s viewed by the IRS as being rented. That means your monthly payments are tax-deductible, which can be a great perk!
Plus, lease payments tend to be lower than car loan payments, and not much cash is needed upfront for a down payment.
Leasing Cons
Leases have a set number of miles allowed, and you pay per mile if you go over that – which can become expensive if you drive a lot.
You also can’t customize the vehicle, like a landscaper needing to add a rack. Plus, the car is not considered your asset.
Buying Pros and Cons
Now, let’s talk about some of the factors to consider when you’re thinking of buying a company vehicle.
Buying Pros
When you buy, the car becomes your asset, helping show the net worth of your business. You can modify it any way you want, drive it as much as you want, and depreciate it. You can even use accelerated depreciation if you need to reduce your profit one year!
Buying Cons
Buying requires a larger upfront down payment, especially if you want to reduce monthly payments. Then, when you sell it, you have to pay capital gains based on how much it’s been depreciated.
3 Biggest Deciding Factors
There is a breakeven point between finding the best value in leasing or buying a company car. However, with all of the factors to consider, it can be hard to pin it down, especially with the cost of vehicles ranging as much as they do. (Don’t even get us started on the extra rules for luxury vehicles!)
That’s why we would rather have business owners focus on the following factors instead: miles, purpose, and your financial situation. They all play into the ultimate goal of having the lowest monthly payment possible.
1.) Miles Put on Vehicle
For many people, the largest factor to decide between leasing or buying a company car is the miles that it will be driven per year. Leasing can be beneficial if it’s not used for a lot of miles, and buying can be beneficial if you put lots of miles on the car.
We say that we say that generally after 12,000-15,000 miles per year, you should buy instead of lease. That’s because most leases are 10,000-12,000 miles per year and charge each additional mile between $0.25-$0.40. This can really bring up costs.
2.) Purpose of Vehicle
The purpose of your vehicle depends largely on your industry. If you’re in an industry like construction, landscaping, or anything else that requires hauling heavy-duty equipment or large product loads, you may have additional needs.
If you need to make modifications to your company vehicle, many leases won’t allow this. If you make those modifications anyway, you’ll be charged for them – and they won’t go easy on your wallet.
Need to tow something? You’ll likely be charged for extra wear and tear on the engine, too. Overall, these charges can be avoided with buying instead of leasing.
3.) Your Financial Situation
Your current financial situation can also influence how much you pay. It’s just the system that we live in.
Let’s talk cash and cash flow. How much can you afford to put down right away? Buying a car requires a larger down payment, but leasing is more affordable upfront.
On the other hand, you need to consider your credit. If you have bad credit, you often won’t be able to lease. However, you can still buy with bad credit, even though it won’t get you a great deal.
If you find success in your business, you might have high profits. A tax strategy to reduce what you owe is to reduce your profits, and this can be done by purchasing a vehicle instead of leasing it. Not to mention, you can accelerate depreciation.
Buy or Lease? Make the Best Choice for Your Business!
Still not sure what to choose? It can be tricky to weigh out all of the factors! Luckily, a monthly accountant can offer advice backed by your current financial situation to make the best decision.
Now that you know about the pros and cons of leasing and buying a company car, plus the three biggest factors that will help you decide, are you ready to check out monthly accounting services?
If so, please consider CSI Accounting & Payroll! To see if we can be a good fit for your business, click the button below for a free consultation:
Not ready to talk? That’s okay! First, learn more about what it’s like to work with CSI by clicking the image below:
