Often, small business owners ask if buying a vehicle is better than leasing a business vehicle or vice versa.
Business owners value assets differently and make decisions entirely based on each owner’s circumstances. Generally, the total cost associated with lease or purchase is ultimately the factor in deal or no deal.
Business owners should be mindful of the pro and cons of each method. It is beneficial to answer some questions before decisions are made.
- Why do I need a company car? Is it an image or a necessity?
- What kind of car/truck, and what is the purpose?
- How often would I use the car for business vs. personal?
- What is the average annual mileage? Leases contract often define a specific mileage allowance.
- Calculate your monthly payments based on the cost of the car, tax and licenses, insurance, credit score, loan terms, and down payment when you purchase. Monthly lease payment is typically less than the monthly payments for a purchased vehicle.
Here are the tax factors to ponder in your decision to buy or lease:
- Depreciation deduction is an expense for the original cost of the car over its useful life and allowed only when purchasing a vehicle. Section 179 and bonus depreciation might increase the deduction if the vehicle was placed in service between Sept 28, 2017, and Dec 31, 2026. When leasing a car, you may be able to deduct lease expenses
- Both methods allow for a deduction of mileage. Higher mileage can reduce your purchased car resale value. A leased vehicle often has mileage limits and could be penalized for over the limit mileage.
- In both methods, you can choose whether to deduct the standard mileage rate or actual costs; however, with a lease vehicle, you must be consistent once you select either option. A deduction of either option is allowed with proper books and records.
- Lease vehicle monthly payments are deductible but will be reduced by a lease inclusion amount. (The IRS publishes a table listing the annual inclusion based on the fair market value of the vehicle, which usually determined at the beginning of the lease). The business use percentage can further reduce this inclusion.
- The lease agreement often covers regular maintenance. Owned vehicle maintenance is the owner’s responsibility.
- The two-method differed when the vehicle is disposed of. Gain or loss is not generated when you complete the term of the lease. However, the residual value will be paid even if the leased vehicle is worthless when the lease ends. Also, any damages to the car will create additional costs for a lease vehicle. Selling an owned vehicle can yield gain or loss and therefore cause a taxable event. The gain that is due to depreciation deduction will be taxed as an ordinary income.