Saturday, September 21, 2019
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Business Vehicles: Lease or Buy?

If your family business is in need of a vehicle, it’s not as simple as strolling onto the dealership lot and picking something out. The truth is, how you acquire a vehicle should depend a great deal on how your family business will use it. Therefore, some planning should be done on the forefront to help you decide a strategy for acquiring a vehicle – either through a purchase or a lease. Which one is right for you depends on many factors and what matches up best to the needs of your family business.

There are many differences between a vehicle purchase and a lease:

 

Purchase

Lease

Down Payment

Down payment (such as 10%) or a trade-in is typically required.

Security deposit required, typically the amount of one to two payments.

Payments

Based on the purchase price.

Based on the purchase price, minus residual value to account for depreciation, plus a lease fee. Typically, lease payments are lower for comparable vehicles.

Ownership

Once you’ve made all your payments, your business owns the car, making it a business asset.

At the end of the term, you must return the car.

Limitations

No mileage restrictions apply. 

Annual mileage is limited based on your contract terms, often with the option to purchase additional miles, though this can be costly. Excessive mileage can cause the cost to be greater than a purchase.

Longevity

With a purchase, you can keep the car as long as you wish.

With a lease, you must return the vehicle at the end of your contract term. Early termination penalties may apply.

Maintenance

As the owner, you maintain the vehicle’s condition as you see fit.

Your lease contract specifies in what condition the vehicle is to be returned.

Customization

You are free to customize your vehicle for business needs.

You may not make any material changes to the vehicle.

Insurance

You can opt for minimum insurance.

Your contract may stipulate how much insurance you must carry.

Tax Consequences

The vehicle is added to your balance sheet as an asset and the loan becomes a liability. Your business can deduct loan interest paid and depreciate the purchase price minus the salvage value over the tax life of the vehicle. See IRS Publication 946 Section 179 for details.

With an operating lease, your business can use the vehicle without assuming other risks or benefits of ownership, and business owners may deduct payments as an expense.

With a capital lease, business owners may have the ability to purchase the vehicle at the end of the term, so the vehicle becomes an asset and its lease, a liability. The business owner may deduct the interest portion of the lease and depreciate the asset value over the contract term.

You may want to purchase if your family business:

  • Tends to keep vehicles for a long time
  • Can afford a down-payment or have a trade-in
  • Can afford monthly loan payments based on the purchase price
  • Wishes to maintain the vehicle as an asset
  • Drives substantially more or substantially less than the annual allotment of lease contract miles allowed
  • Needs to customize its vehicles
  • Is profitable so the vehicle can be used as a tax deduction

You may want to lease if your family business:

  • Trades its vehicles frequently
  • Doesn’t want to put down cash for a down payment or have a trade-in
  • Wants lower monthly payments
  • Does not wish to keep the vehicle as an asset after the contract ends
  • Drives only the amount of miles provided in the lease agreement
  • Does not need to customize its vehicle
  • Is less profitable so your business can deduct monthly expenses

As always, consult your tax advisor before deciding whether to purchase or lease a vehicle for your family business. This advisor will be able to help you determine the best strategy for you.

Contributing Sources: http://smallbusiness.chron.com/better-lease-buy-truck-business-taxes-4151.html

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