Posted by Income Taxes and Bookkeeping LLC

Business Vehicle Expenses Taxation Leased vs. Bought

Business Vehicle Expenses Taxation Leased vs. Bought

Choosing a new vehicle for your business is an extremely interesting step, but before choosing a black or red SUV or truck, you must first decide whether to lease or buy it. Leasing or buying comes down to three main factors: the miles you plan to drive, the amount of money you're willing to spend, and how the vehicle will be used. We are going to look at the pros and cons of leasing a vehicle versus buying it.

Leasing a Car

When you lease a car, you pay to drive the vehicle for a specified period, usually three to four years. The dealer finances most leases.

You'll typically pay an amount upfront to pick up your new vehicle from the lot to cover a variety of taxes and fees. From there, you will make monthly payments for the duration of the contract to cover the vehicle depreciation cost. There are usually restrictions on the number of miles you can travel during the lease period. You must return the vehicle to the dealership in excellent condition to avoid additional charges.

The advantages of leasing a car

  • Less money upfront: Besides what you pay during the lease, the initial payment may not be so high- you might be able to drive off without any down payment.

  • Lower payments: If you're trying to control your monthly expenses, leasing a car tends to give you the advantage of paying less for a newer car than when you buy it.

  • Manufacture warranty options: As long as you have the keys, you'll likely get warranty protection, typically lasting the first three years or 36,000 miles.

Disadvantages of leasing a car

  • Mileage restrictions: Leasing can give you easier access to the driver's seat of a new car, but you won't have full control of it. Most leases have annual mileage restrictions, typically ranging from 10,000 to 15,000 miles. If you exceed these limits, you will pay a premium, usually around 30 cents per mile.

  • Additional costs: In addition to the excess mileage charge, there's also a charge for any "excess wear and tear." 

  • You will not be the owner in the end: Unless you choose to opt for a lease buyout, which is likely to involve financing anyway, your monthly payments will continue when you renew your lease or lease a new vehicle. That means you'll never run out of payments, and you'll never own the car to yourself.

Who should consider leasing?

Leasing is the right option for you if you want to be behind the wheel of a vehicle without a large financial commitment upfront. Unlike financing a vehicle with a car loan, leasing reduces the monthly cost to a more manageable one. It also allows you to drive a more luxurious vehicle than you otherwise could afford.

But be aware of mileage restrictions and possible excess wear and tear associated with leasing. If you have long trips in the future, leasing may not be right for you.

Buying a Car

Buying a vehicle means keeping ownership of the car rather than leasing it for a few years. If you are looking for a new car, it can have a high price tag. According to Kelley Blue Book data, the average cost to buy a new vehicle in December 2021 was more than $47,000.

However, there are other, more affordable options for buying a car, including certified pre-owned vehicles and used cars. For new cars purchased on loan, the price of the monthly payments is generally higher than the rental price. However, the vehicle is officially yours once the vehicle is paid for.

The benefits of buying a car

  • No mileage limit: You don't need to track your mileage when you buy a car. If you want to drive across the country or rack up 100,000 miles in a year, you can do it without worrying about additional costs.

  • No wear and tear charges: Along with no mileage limits, you won't have to worry about what a dealership considers "normal wear and tear," which is of concern to anyone leasing or having to pay for repairs at the end of the lease.

  • Possibility of selling or exchanging the vehicle: Because the car is yours, you won't have to worry about what to do when your car loan is fully paid off. When you're ready to buy a new car, truck or SUV, sell or modify it at your current market value, based on mileage and conditions.

Disadvantages of buying a car

  • Higher monthly payments: You'll likely spend more each month when you buy a car. For example, the average monthly payment for those who bought a Jeep Grand Cherokee was $608, or $138 more than the average monthly rent payment, according to Experian's State of the Auto Finance Market report.

  • A higher advance is required: Depositing more money can, of course, reduce the amount you need to borrow and, by extension, your monthly payments, but it will require more savings.

  • Long-term maintenance costs: Finally, owning a car brings the same pride and potential problems as owning a house - let's just say you have it until you have to pay to fix it if something goes wrong.

Who should consider buying a car?

If you prefer to have complete control over your vehicle and finances, the purchase may be in your best interest. You won't have to worry about mileage restrictions or possible additional costs for things like wear and tear. Although buying or financing your vehicle through a loan requires additional preparation, you will own the full ownership of the vehicle. You can resell or trade it at any time, an advantage that leasing does not get you.

Bottom Line

Whether you choose to lease or buy a car, it's important to remember a few key factors beforehand to get the best deal. Your credit score serves as the primary measure of your ability to make monthly payments. Look for a score between 680 and 739 for rent and 661 or higher if you choose to buy. Also, consider the time of the month, year, or even week you decide to go to the dealership.

The decision to rent or buy a car depends on carefully assessing your finances and driving habits. Think about how much you can comfortably pay upfront each month and how many miles you spend on the road to find the most convenient mode of transportation. 



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