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Key Considerations on Leasing or Buying a Vehicle for Your Small Business
Posted by Sylvia Lagerquist, CPA
Whether you’re in need of a vehicle for commercial operations such as product delivery or bringing equipment to the job site, or the goal is to stop putting thousands of miles on your personal car, you might be at a point where it’s time to consider acquiring a vehicle for your business.
There are generally two key questions to answer. The first is whether adding a car to the business actually makes sense. And the second is whether leasing or buying is the better way to go.
Question 1: Should I acquire a vehicle for my business?
First off, are you going to acquire the vehicle personally but use it for business, or do you intend for the business to actually acquire the vehicle directly? This is an essential question because if a vehicle is acquired directly by the business, you will need to insure it in the business name and this may be much more expensive than what you are accustomed do when acquiring a vehicle for primarily personal use and insuring it directly through your own personal carrier.
If we’re talking about a sedan or SUV that you will essentially use to drive yourself to business meetings, you need to verify some key items. The first is whether or not the vehicle will be used for clear business purposes at least 50% of the time. Remember that for tax purposes, only the business driving portion of the vehicle costs will count.
Another factor is that if you are leasing a car for the business, you must use the actual cost method for deductions in order to calculate the driving deduction. And finally, if you choose a car with a very high lease value, the IRS has a special rule requiring the use of an “inclusion amount” to reduce the deductibility of the vehicle so that it stays within certain limits.
Yet another factor is the cost of insurance. Consult your insurance agent about the cost differential between a vehicle in your personal name or a vehicle in the business name, since the difference can be significant (as we mentioned earlier).
So the bottom line is this: If the car is not going to be primarily (if not exclusively) used for the business, think long and hard before proceeding to acquire one under the business or for business purposes.
Question 2: Should I lease or buy a vehicle for my business?
Regarding the second question — to lease or to buy – there is no magic answer but there are key factors to consider when weighing these two options. Some of those factors include:
Mileage – Business vehicles tend to be exposed to very high utilization, which means they suffer wear and tear faster. Many leases are designed around low-mileage usage scenarios, so this could be a challenge if you lease. On the other hand, a vehicle with high mileage also depreciates faster, so owning may not make sense if you intend on selling the car as used in the future since its resale value may be very low.
Drivers – If you plan on having anyone other than you drive the vehicle, keep in mind that this may impact your lease terms. If this is a van or commercial fleet vehicle, that may be understood but if this is a sedan you may need to review the lease carefully to ensure that this is addressed.
Usage Intensity – Ironically, heavy usage of a vehicle may actually lead you to consider a commercial lease, largely because a failing fleet can become a costly liability to any business if you don’t have in-house mechanical and maintenance capabilities. Put another way, purchasing your delivery vehicles may look great on paper until three or four years in and half of the fleet is either in the shop for costly repairs, or sitting in a lot awaiting them. This not only has to do with the intensity of the usage, but its role in the business. If your vehicle(s) are mission critical, then you may benefit from the reliability of a leasing arrangement that has known replacement dates and fleet replenishment strategies built in.
Lease Types – In auto leases, there are two typical lease types. One is an open lease, and the other is a closed lease. Closed leases are often used with consumers whereas open leases are typically applied for commercial vehicle leases, since in an open lease there is more room for the auto dealer to address and charge the customer for increased driving or heavier wear and tear on the vehicle.
Cash Position – If you have cash on hand and are comfortable with the up-front down payment as well as the cost of maintenance and other considerations, then certainly purchasing can be a strong option. This is particularly true if you believe the useful life of the vehicle for your business will be longer than the time frame of the loan used to finance the purchase. But again, carefully consider the costs of maintenance, management and ultimately, vehicle replacement within a realistic timeline.
Reliable and professional transportation is one of the most essential assets of a business, and can often be key to its competitive advantages in the marketplace. When considering how or if to acquire a vehicle for your business, take time to examine each of the points discussed here and create a plan that works best for your business.
Image Credit: 28704869 (Flickr @ Creative Commons)
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