Whether it’s your first day in business or your 10-year anniversary, it may be time to get a business vehicle. A business car can make running your company easier than ever—from errands to deliveries. So, if you’re wondering, “Should I lease or buy car for business?” We’ve got you covered. Read on to learn what’s best for your business.
Should you lease or buy car for business?
A business vehicle doesn’t have to be a car. In fact, a business vehicle can be a car, bus, van, truck, or any other motorized vehicle for business use.
There are pros and cons to both leasing and buying a business vehicle. So, which one is the best option? Lease vs. buy car for business?
Buying a car for business means you might have to spend a large amount of money for a down payment. This could be the right choice for your business if you have the money. But if you’re low on funds or don’t want to own a vehicle, you may want to lease your business vehicle because you’ll spend less money upfront.
Before you step onto a car lot, here are some questions you may want to ask yourself:
- What is my budget like?
- What is the vehicle going to be used for?
- What kind of tax deductions can I claim?
1. What is my budget like?
There are several things that go into budgeting for a business vehicle. You may have enough money to buy a car outright. But more often than not, you’ll make a monthly payment whether you lease or buy the business vehicle.
Budget for purchasing a business vehicle
If you’re considering purchasing a business vehicle, see what your budget can handle. Understanding your budget is easy if you can pay for the car all at once. But, if you take out a loan, understanding the car’s final price is more complicated. If you take out a loan for your business vehicle, you have to consider your down payment, the loan amount, the annual percentage rate (APR), and the loan length.
The size of your down payment lowers the cost of your car’s loan and your monthly interest rate. Generally, a down payment for a new car should be 20% of the car’s total price. The down payment should be closer to 10% if the car’s used.
Let’s look at an example of purchasing a business vehicle in action. The cleaning business Helping Hands is looking to buy a new business car for $49,388. So, a 20% down payment costs Helping Hands $9,877.60 ($49,388 X 0.20).
After their down payment, the company still has to worry about the car’s loan payments. Car loan payments consist of the loan amount (that covers the full expense of the car), the annual percentage rate (APR), and the loan length. Helping Hands lowered the car’s total price with its $9,877.60 down payment. The adjusted cost of the vehicle is $39,510.40 ($49,388 – $9,877.60) and is covered by a car loan.
When looking for auto loans, looking for an APR and a loan term that fits your budget is essential. Helping Hands shopped around and decided on a 3.00% APR paid over five years (60 months). With an APR of 3.00%, Helping Hands will have a $710 monthly payment.
So, how much will Helping Hands pay for its business vehicle when everything is said and done? Helping Hands will pay $42,600 ($710 X 60) in monthly payments at the end of the five years. When adding in the down payment cost, the business vehicle costs Helping Hands a total of $52,477.60 ($42,600 + $9,877.60).
Grand total to purchase a car over a five-year period: $52,477.60
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Budget for leasing a business vehicle
If you can’t afford a down payment on a business vehicle, leasing may be your best option. When leasing a business vehicle, make sure your budget can cover the monthly payments of the lease and any additional payments that may come up, like an acquisition fee or a down payment.
Some dealers may require a down payment for a leased vehicle. Remember that any down payment lowers your monthly payments. So if your budget can afford a down payment, you may want to consider it. A recommended down payment for a leased vehicle is 20% of its value.
Let’s look at an example of leasing a business vehicle. The company Fergie’s Floral wants to lease a van for deliveries. The dealer requires $2,000 as a down payment on a lease lasting 60 months (e.g., five years). Fergie’s Floral monthly payments are $433 per month, or $25,980 ($433 X 60) for the five-year period. Including the down payment, Fergie’s Floral will pay $27,980 ($2,000 + $25,980).
Grand total to lease a car for five years: $27,980
You may come across additional fees depending on the dealer you speak with. Additional fees may include an acquisition fee and a return fee. And if you drive over your car’s annual mileage maximum, you’ll be charged for the additional miles.
2. What is the vehicle going to be used for?
You know that you need a business vehicle, but have you thought about how you’ll use it day in and day out? How you use your business vehicle affects how many miles you drive annually and any possible damage it may sustain during everyday use.
How often will I use the car for business?
Whether you lease or buy a car, how often you use the car for business purposes can affect how much you can claim on certain deductions. For instance, if you use the car 100% of the time for your business, you may be able to claim 100% of your actual expenses. But if you use your business vehicle for business purposes 60% of the time, you can claim 60% of your car-related expenses as tax deductions.
To find your actual expense deduction, multiply your annual vehicle expenses by the vehicle’s business use percentage.
Actual Expense = Annual Vehicle Expenses X Percentage of Vehicle’s Business Use
Here are all of the expenses you can calculate to use the actual expense method:
- Gas
- Oil
- Maintenance and repairs
- Tires
- Registration fees
- Insurance
- Licenses
- Lease payments
Think about it this way: The more you use your business car solely for business purposes, the more you can reduce its overall price through deductions. This may be the difference between buying or leasing a car.
How many business miles do I expect to drive?
Business mileage matters for two reasons:
- Many lease agreements have an annual mileage maximum
- You can use the business mileage deduction to claim deductions for business miles driven
If you are considering leasing a business car, make sure you understand how many miles you log annually. Consider both business and personal miles for your total. Make sure to look for leases that give you ample mileage if you overshoot your estimate.
Whether you buy or lease, keep the business mileage deduction in mind.
What’s eligible for the business mileage deduction? You can deduct the miles driven to:
- Meet clients or customers
- Complete business transactions at the bank
- Pick up office supplies
- Conduct any other business-related errands
- Meet with your accountant or small business lawyer
The rate of the business mileage deduction can change annually.
What extent of wear and tear do I expect from normal business activities?
Business vehicles can go through a lot of wear and tear. Running deliveries, picking up supplies, making business trips. It all adds up. If your everyday business activities may damage your business vehicle, you may want to consider buying over leasing.
When leasing a business vehicle, wear and tear may add fines and fees to your final bill. But, if you own the car, wear and tear won’t matter as much.
3. What kind of tax deductions can I claim?
There are plenty of options when it comes to tax deductions for a business vehicle, whether you lease or buy. The deductions available may help you decide which option is best for you.
If you lease a business car, you may be able to claim the following deductions:
- Standard mileage
- Actual expense
If you buy a business car, you may be able to claim the following deductions:
- Standard mileage
- Actual expense
- Section 179
- Depreciation
Pros and cons of leasing a business vehicle
Still wondering if leasing is right for you? Check out our list of pros and cons of leasing a business vehicle.
| Pros of Leasing a Business Vehicle | Cons of Leasing a Business Vehicle |
|---|---|
| You can enjoy the car during its best years if you lease a newer vehicle. | Leasing may cost more money in the long run because you often pay for it during years of high depreciation. |
| Leased cars are often still covered by the manufacturer’s new-car warranty. | Lease contracts allow a set number of miles. If you drive more than the allotted miles, you’ll have to pay an excess mileage penalty, ranging from $0.10 to $0.50 for each additional mile. |
| The lease may include additional perks like free oil changes and occasional maintenance. | If there’s noticeable wear and tear to the leased vehicle, you may have to pay additional charges when you turn it back in. |
| You may be able to afford a higher-end business car through leasing than through ownership. | If you realize you can’t pay and need to break the lease, you may be left with early termination fees and penalties. |
| Leasing a car for business comes with tax benefits like deducting expenses for the leased car. | If you only lease cars, you’ll always be paying monthly payments. |
Pros and cons of buying a business vehicle
So, should you purchase a business vehicle for your company? Check out our list of buying a business vehicle pros and cons.
| Pros of Buying a Business Vehicle | Cons of Buying a Business Vehicle |
|---|---|
| Several tax benefits come with buying a company car, like deducting qualifying expenses, depreciation, and Section 179. | You may not have enough money to make a down payment. |
| Once you own the car, you can modify it however you’d like (e.g., add paint, logo, etc.). | Your monthly loan payment may be higher than a lease payment until the loan is paid off. |
| The longer you own the car, the lower your long-term costs. Once the car is paid off, you only have to pay for routine maintenance, gas, and insurance. | Paying for routine maintenance of the vehicle may cost more than you expected. |
| You can sell the vehicle whenever you’d like. | If you depreciate the vehicle completely, you may owe a recapture tax once you sell it or trade it in. |
To claim tax deductions, you must keep detailed records of business vehicle expenses. Lucky for you, Patriot’s online accounting software makes tracking expenses and income easier than ever. Try it for free today!
This is not intended as legal advice; for more information, please click here.
