Whether you need a fleet of vehicles for your delivery staff, a few trucks on hand for company errands and sales trips, or you want to provide executives with a company car as a perk in their overall compensation package, business owners face the tough decisions about financing company cars. From choosing the right vehicle to represent the company to setting up the wisest payment options, there are many things to consider before you even step on the car lot.
Buy or Lease?
There are some key differences in the benefits of buying vs leasing your company vehicle. Purchasing the vehicle might mean more money in down and monthly payments, but you can depreciate the vehicle on your taxes, and you own the vehicle at the end of the payment schedule. When you are done with the vehicle you can still sell it.
When you lease, your payments may be lower and your payment is based on the residual value of the vehicle, meaning they subtract the expected value of the vehicle when you turn it back in at the end of the lease. Leased cars don’t get the same deductions as owned vehicles, but we will talk about that later.
Do You have Cash on Hand?
How many vehicles do you need and how much cash does your business have on hand? Buying requires down payments per vehicle. If you need several vehicles, that can add up fast. Leases are sometimes a different kind of deal. In fact, often the lease will include the down payment, first month’s payment, a refundable security deposit – since the vehicle is still theirs you have a lot more flexibility for getting into the payments.
Maintenance is also a financial consideration for this decision. Will you be paying out of pocket for repairs and routine maintenance or will you be bringing it for a service plan? Explore options of adding maintenance plans to your financing to mitigate future costs and stay on budget.
Who’s Driving and How Many Miles?
One of the biggest determining factors is the driver and purpose of the vehicle. Leases come with mileage limitations, often 10,000 or 12,000 miles annually. While high-mileage leases are available, it raises the monthly cost of the vehicle for the business and can still result in extra fees for each mile over the limit that is traveled during the life of the lease. If you can’t control the amount of miles being put on the vehicle, purchasing might be a better option in the long run.
Additionally, you’ll want to think ahead to the future and your plans for that vehicle at the end of the payment terms. Leasing gives you the option to walk away from a particular vehicle when the lease period is up, and you can start fresh or choose to buy at that time if you weren’t pleased with the leasing experience. When you buy, the vehicle is an investment and you can sell it down the line to recover some of your costs.
Last, but not least, there is the impact on your company’s taxes. Turbo Tax has a full rundown, but in general you’ll find that car lease payments are tax deductible each year. Only the interest on your car loan is tax deductible if you purchase a car for business, but you can also depreciate the value of the vehicle in your deductions. Whether you lease a car for business or buy, both options are eligible for some level of depreciation, depending upon a variety of factors. You should consult a tax advisor for more information specific to your business though to get the full scoop.
Whether you are looking lease or buy a single car or fleet of vehicles, careful consideration and planning can help your business operate more smoothly. Take time to consider all the financial factors of leasing vs purchasing before making a final choice. Project realistic expectations for your need and use of vehicles and choose the option that is right for your business for the present and the future.
Advisory services offered through EWG Elevate, Inc. dba Protection Point Advisors.
This represents a partial list of clients. They have not been compensated and were not selected based on duration, performance, account size.