Home Business & Finance Should you lease or buy your business vehicles?

Should you lease or buy your business vehicles?

The last thing a small business owner needs is car trouble. When you’re deciding on a business vehicle, find out what factors to weigh, including leasing or buying and costs such as road tax and insurance.

When it’s time to get a new vehicle for your business, you need to answer a few questions.

Consider how you will use the business vehicle, how many miles you are likely to put on the car each year, how much money you have on hand for your business, and how long you plan to keep the vehicle.

Depending on your answers, you will also want to check the requirements for business auto lease insurance. While similar to other car insurance policies, there may be special insurance requirements for your lease.


Business Considerations

Running a small business involves doing a balancing act. Depending on the type of business you have, you are concerned with a long list of factors, including regular day-to-day operations, brand development and marketing, cash flow issues, and employee compensation and retention.

When you need to replace your business vehicle, you may feel pressed for time. A business vehicle can seem like a pretty straightforward purchase, but if you overlook one or two minor details, your expenses could be more than you counted on.

Either option will have advantages and disadvantages for you and your business. There are things to consider around cash flow, taxes, and maintenance issues.


Business Lease Positives

There are many advantages to a business vehicle lease, including lower monthly payments for a lease. Also, those monthly payments are tax-deductible and filed as business expenses. You simply return the vehicle to the dealership when the lease is done.

One of the most significant advantages of a lease is that there will be no maintenance or repair costs beyond the regular monthly payment.

To qualify for a business lease, you must check your personal and business credit reports. You’ll also need to gather your business’ tax returns, the balance sheet, and an income statement.

There is a chance your business lease application will be rejected. If that happens, you may decide to put up assets as collateral. Offering collateral may be the make-or-break move if your business is relatively new or you have a spotty credit history.

Another option to lower your cost is to lease a pre-owned or used vehicle, although it’s usually easier to lease a new car.


Business Lease Negatives

Limitations on mileage are one of the most significant disadvantages of leasing. All leases come with driving mileage limits, although the specifics vary and can be negotiated higher for a higher cost.

Generally, a lease limits you to between 10,000 and 15,000 miles per year. If you go over the miles specified in the contract, you’ll be charged a set amount per mile over the limit, which can add up very quickly.

When shopping for a vehicle to lease, you are limited to the dealer’s stock on hand. There are no customization options for a leased car.

At lease end, there may be charges due for things you weren’t expecting, like an early termination fee or payments for excessive wear and tear.


Pros of Purchasing a Business Vehicle

One of the biggest advantages of purchasing a business vehicle is that you can sell it if you choose and recoup some of the investment. While using the car, you don’t need to worry about mileage limitations, either.

And because it’s your business vehicle, you have the option to add custom paint or advertising to the car without worry.

The cost of a purchased vehicle is a depreciable business expense. If you opt to buy certain cars like hybrids or electrics, there may be tax breaks your business is eligible to take.

Cons of Business Vehicle Purchase

Purchasing a business vehicle requires more money overall and usually means higher monthly payments than leasing a similar car. You will also likely have higher maintenance and repair costs.

Even if you are offered three years of free routine maintenance, you are responsible for the rest. At the end of the car’s life, you will be able to trade it in for another vehicle or sell it outright.

You simply return the vehicle to the dealer at the end of a vehicle lease. This does not affect the business finances. If you buy the vehicle and decide to sell it, you will create a taxable event.

Selling a vehicle may generate a deductible loss if the depreciated cost of the vehicle exceeds the proceeds from the sale; you will have a taxable gain. A gain from depreciation recapture is taxable as ordinary income, resulting in a higher tax bill.


Leasing vs. Buying

When considering your next business vehicle purchase, your best decision depends on your business and your financial situation. If you are looking at a luxury vehicle and won’t put a lot of miles on it, a lease could be your best option.

If you have a retail business or own a small manufacturer or artisan shop, you may be looking at a vehicle that can haul inventory and supplies. Buying is a better option when you drive many miles for business.

Buying means you don’t need to worry about excessive mileage, and you can take advantage of vehicle depreciation, which leasing doesn’t offer. Also, if you are self-employed, leasing provides tax advantages for self-employed people who drive for work, especially for more expensive cars.

All self-employed people can take advantage of other business-related car expenses, like parking fees and tolls, gasoline, oil, insurance, garage rent, registration fees, lease fees, and repairs. Those who work from home can benefit from telecommuting insurance.

If you drive a lot, you may well do better to look at buying, if only to avoid limitations on annual mileage. Look at your situation, consider your taxes, cash flow, and exactly what your needs are.

If you decide to lease, you need to be aware of the residual value or the amount you will have to pay at the end of the lease if you choose to buy the vehicle. The residual value represents the appraised market value of the car after the lease ends.


Business Relationship with a Dealer

Whether you decide to lease or buy, need one vehicle or several, establishing a business relationship with a local dealer may have advantages. An ongoing business relationship will likely make it easier to schedule maintenance and get a loaner when your regular cars are in for repair.

Your business likely has a regular service tech for your HVAC, landscaping, IT support, and accounting. Establishing a relationship with a preferred automobile dealership can be a valuable connection to have.


Alexandra Arcand writes and researches for the auto insurance comparison site, AutoInsurance.org. She is a small business and insurance expert who enjoys helping entrepreneurs get the best vehicles to fit their needs.

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