Many small business owners may find that a car becomes necessary to operate their businesses, whether they’re just starting out or aiming to grow their ventures to the next level.
The first step in this process is deciding whether buying or leasing a car for business purposes is best for you. The main difference between the two is that buying a car gives the business complete ownership, allowing it to customize and put on unlimited miles. However, leasing a car for your business can mean lower monthly payments. To help you with your decision, here are some considerations when choosing a business car lease versus purchase.
- Leasing versus buying a business vehicle depends on several key considerations that differ across small businesses.
- You can make the best decision by focusing on your business’s current financial health, the need and purpose of a vehicle, and what level of ownership you want.
- A lease buyout presents a good option for the best of both worlds in the short and long term.
Buying vs. Leasing a Car for Business at a Glance
|Leasing a Car||Buying a Car|
|Payments||Lower monthly payments and no down payment||Higher monthly payments and down payment|
|Maintenance||Included in your monthly payments along with minimal wear and tear||Up to the owner to cover maintenance and wear and tear repairs|
|Mileage||Penalties for higher mileage than leasing terms||No mileage limits or penalties|
|Customization||Not allowed||At the owner’s discretion|
|Tax Benefits||Mileage and part of lease payment may be tax-deductible||Depreciation and mileage are tax-deductible|
Both buying and leasing a business vehicle come with initial costs that may dictate your choice. Buying a car can take a significant down payment, which can eat into your immediate cash flow. Leasing a car, however, typically requires a security deposit, usually equal to one month’s payment rounded up.
Many business owners take out loans from banking institutions to purchase a car outright, creating higher monthly payments toward the loan’s interest first, and principal second. Purchasing a car takes up short-term cash flow and could affect your ability to take out additional loans for the business. Yet this translates into long-term value as you have a stable asset on your balance sheet.
Leasing a car can mean lower monthly payments to free up your immediate cash flow. Because of smaller payments, you can afford to drive an updated vehicle that normally would be out of your price range. However, going from one lease to the next can lead to higher costs over the long run. Buying a car becomes a more favorable option for value over time because payments stop once the loan is paid off.
Regularly scheduled maintenance checks and repairs are crucial to keep your asset running smoothly. But how you take care of maintenance depends on whether you lease or buy.
Depending on the agreement, leased vehicles include some form of maintenance, some repairs, and even free oil changes, which can alleviate the stress of vehicle repair. A lease also covers basic wear and tear, although anything out of the ordinary will result in fines. Buying a vehicle places the responsibility solely in the hands of the owner. You bear the cost when it comes to scheduling and repairs, although excessive wear and tear isn’t a concern.
Companies that need a van may fare better with purchasing a vehicle outright. Vans often used for business activities such as moving large products and transporting tools or inventory are more prone to wear and tear.
Deciding whether buying or leasing a car for a small business means being clear on the purpose of the vehicle. Knowing this will help you figure out how many miles you plan on putting on in a year.
A lease agreement comes with a mileage allowance that dictates how many miles you can put on the vehicle. You start incurring mileage fees when you go above the allowance, and those add up quickly. Fees range anywhere from 10 cents to 50 cents per additional mile.
Mileage considerations can make buying a car a more cost-effective decision in the long run. You don’t need to limit your drive time or hold yourself to a set amount of miles, because your ownership gives you complete authority.
Some small businesses may want to utilize vehicle marketing by outfitting their automobile with company decals and stickers. Buying a car gives you the option to customize however you prefer.
A leased car must be returned in near showroom condition, apart from normal wear and tear. Customizations are not allowed for these vehicles or may result in significant fees.
A small business reaps considerable tax advantages when utilizing a specific vehicle for company operations. An owned car can use depreciation and standard rate or actual costs as deductions. A leased car can use standard rate or actual cost as an expense, but not both.
- Depreciation: Depreciation is the amount you can deduct over the vehicle’s lifespan that accounts for a drop in value. A car becomes less valuable over time from wear and tear and mileage accrual, and this decrease in value can be claimed as a deduction.
- Standard rate: As determined by the IRS, a business owner can deduct the standard mileage rate for business miles driven, using the standard rate method for the entirety of the lease. This must be started in the first year the car is available to your business. In 2022, the standard mileage rate is 58.5 cents per mile.
- Actual cost: You can use the actual cost method to deduct the costs associated with operating a vehicle, including gas, oil, repairs, and depreciation or lease payments.
Tracking miles carefully on a business vehicle is key to taking deductions as the IRS will need thorough documentation. Business mileage includes visiting customers, picking up supplies, or driving to meetings. It’s important to note that travel from home to your workplace, also known as commuting, is not included.
Which Is Right for Your Business?
Deciding whether to lease versus buy for business depends on your circumstances and how you weigh the different considerations. There is no one-size-fits-all methodology for small business car leasing or ownership, but there are a few questions to answer that can provide clarity on what works best for you at any given time:
- How much money do you currently have for a down payment?
- How many miles do you think you’ll put on in a year?
- Do you want any customization on your business vehicle?
- How will the car be used, and will that incur abnormal wear and tear?
- Do you want to deal with maintenance yourself?
Every business case will be different when it comes to buying or leasing a vehicle. If you have enough borrowing power and cash flow, buying a car offers a long-term investment. Further, if your business will need to use a vehicle extensively, purchasing a car outright means you aren’t limited to a specific amount of miles.
On the other hand, a more limited cash flow may make leasing a car a much better decision. Leasing a car is also best for a business owner who doesn’t want to take care of maintenance or desires the latest vehicle on the market.
Best of Both Worlds Option
Some leasing agencies may offer a chance to purchase the vehicle once the lease ends. Also known as a lease buyout, this is a fantastic option to keep your cash flow available during the lease while also investing in a long-term asset. Reach out to a few leasing agencies to explore adding this to your lease terms.
Finally, your business growth may call for a change in vehicle ownership. You always have the option to lease a car first and buy one after that lease ends if it's a more financially sound decision.
Frequently Asked Questions (FAQs)
Is it better to lease or finance a car for tax purposes?
Both buying and leasing give you tax advantages with adequate recordkeeping. Buying a car means you can use depreciation as a deduction if you use the vehicle at least 50% of the time for business purposes. Buying and leasing also mean you can use a standard or actual cost method to deduct things such as mileage or lease payments, gas, and repair.
When starting a small business, is it better to buy or lease a car?
This answer differs for every business. A small business owner needs to consider the purpose of the vehicle, how often it will be driven, and what level of maintenance they're comfortable putting on their shoulders (or wallets).
How can I insure my business car?
A business car must be insured just as a personal vehicle would be, and you can work with a local insurance agent or business advisor to find the best insurance coverage and prices. Leasing and buying may also affect coverage type and price.
Edmunds. “5 Car Lease Strategies You Didn't Know About.”
Consumer Reports. "Leasing vs. Buying a New Car."