While advantages and disadvantages exist for buying versus leasing a new vehicle, these considerations are especially important for business owners, because there are a multitude of additional risks, requirements and tax considerations that don’t apply to regular drivers.
Business vehicle are often used by many drivers for a wide variety of tasks, such as carrying cargo from point A to point B or wining and dining potential clients, depending on the type of business you run. If you need to use the vehicle at your leisure without concern for the mileage, such as traveling out of state on an ongoing basis, then it is probably in your best interest to buy a car, because lease agreements often restrict the amount of mileage you can put on the vehicle over the course of your lease term and may include steep charges for additional miles. If you only need to use the car occasionally, leasing may be an option for you.
When you lease a vehicle, you don’t own it. That means that if you put any decals or other graphics on your vehicle to represent your business, you’ll need to remove them -- and return the car in the same condition it was in at the start of your lease. If you buy the vehicle outright, however, you are free to paint or modify it in any way that you choose without worrying about the repercussions.
Avoid making any permanent modifications to a leased vehicle. If the leasing agency finds that you have modified the vehicle, it may consider it as damage and charge you a hefty bill to restore it to its original condition.
The biggest reason that people lease a vehicle instead of buying one is that they can’t afford to buy a car and are unable to secure a loan due to low credit. While business owners typically have more loan options available to them by using the business as collateral, buying a car outright could still leave you with low funds on hand for other expenses. While you may still need to pay out a hefty down payment if you lease a vehicle, it will not be as expensive as buying a car. Also, any vehicle you lease will depreciate in value over the course of your lease agreement, leaving you with the option to buy it at the end of your lease for the residual value instead of the full retail price.
The residual value of a vehicle is the amount that the car is expected to be at the end of your lease agreement. If your lease agreement specifies that your $25,000 vehicle, for example, will be worth 58 percent of its suggested retail price in 36 months, you would only have to pay $14,500 if you chose to buy it at the end of the lease agreement.
Even if the vehicle is your personal car and isn’t used by your business at all, you can still count it as a business expense as long as you need it for transportation to and from work or if you use it to advertise your business by using window graphics or decals.
As a business expense, your vehicle is also tax deductible. While the sales tax can be written off on your annual taxes, any assets that you trade in or use as collateral toward your loan can be counted as lost income, which can be written off on your income taxes.
You can also discount a portion of your fuel and maintenance expenses from your taxes as well, as these are considered business expenses.
