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Lease or Buy a Car: Business Tax Advantages and Considerations

If you’re looking to purchase a new car you may be wondering what the tax benefits and disadvantages are between buying and leasing a car. There are several factors you should consider in your decision to lease or buy a car for your Agency. It’s important to not only look at the immediate tax savings but the recurring cash requirements to purchase assets.

Many Agency owners are torn when deciding whether buying or leasing a car for the business provides better tax advantages. Knowing the facts and if you can benefit from a business vehicle tax deduction can help you make an informed decision. Here are some of the key factors you should consider before your next car purchase. 

If you’re looking for help with difficult business tax decisions and understanding tax laws, here’s where to start. 

 

Is It Better to Have Loan Payments or Lease Payments 

There are two major tax implications you should consider when choosing between whether to buy or lease a car for business.

  • Depreciation: If you purchase a car and use the car for business more than half the time, you could qualify for a depreciation deduction that acts as an expense to your business and reduces your taxable income. Accelerated depreciation, including a section 179 deduction, or bonus depreciation can increase your deductible expenses during the first year of car ownership. 

If you lease a car for business, tax deductible benefits for vehicle depreciation are not available. 

  • Mileage expenses: If you are a sole proprietor filing schedule C or an S Corporation owner, you can deduct mileage expenses for purchased or leased vehicles. 

If you’re leasing a car, keep in mind leased vehicles usually have a mileage limit and you could be charged a penalty for exceeding the limit. 

If you own a car, high mileage could reduce the resale value of your car.

Whether you own or lease a car for your business, tracking your mileage is crucial and you are required to separate the mileage from personal and business use. Keep in mind that commuting to and from work does not count towards business miles.

Our Club Capital Mobile App (available on Apple or Android App stores) includes a free mileage tracking feature to help capture your mileage expenses.

 

Factors to Consider When Deciding to Buy or Lease A Car for Business  

  • Initial cost can vary when buying or leasing a car, from a down payment to purchase a car or a security deposit when you lease. 

  • The financing rate or monthly finance payments are generally higher than monthly payments on a lease.

  • Anticipated mileage rate or mileage limits for leased cars.

  • Maintenance or repair costs can either be covered by the lease agreement or out of pocket expenses when you own the vehicle. 

Should I Buy or Lease a Business Car

The best option for you depends on your specific situation and business circumstances. You should consider your financial position and what the vehicle will be used for when making a decision. 

Your dedicated Club Capital finance expert can help you navigate difficult tax decisions. Learn more about Club Capital’s small business accounting software. 

Our experts at Club Capital are available to assist you with any tax related questions, email us at tax@club.capital for more information. 

Let's look at an example to better understand the tax advantages and considerations of buying or leasing a car for your Agency. In this example, we’ll use a 2021 Jeep Grand Cherokee priced at $50,000 and used for business purposes 50% of the time.

Vehicle: 2021 Jeep Grand Cherokee
Vehicle Price: $50,000
Used for Business Purposes: 50% of the time

 

Lease

Own

(assuming vehicle is over 6,000 lbs)

Own

(assuming vehicle is  under 6,000 lbs)

Initial Cost

$5,000 down

$10,000
(20% down payment)

$10,000
(20% down payment)

Initial Cost as Expense to Business

$2,500

N/A

This went to purchase an asset that will be deprecated over the life of the vehicle.

N/A

 This went to purchase an asset that will be deprecated over the life of the vehicle.

Monthly Payment

$600

$700 over 60 months

$700 over 60 months

Annual Business Expense from Monthly Payments

$3,600

($600 x 12 x 50%)

$300

(2.9% financing on a $40k 60 month loan is annual interest paid of $600.  This represents 50% of that interest expense to the business)

$300

(2.9% financing on a $40k 60 month loan is annual interest paid of $600.  This represents 50% of that interest expense to the business)

Section 179 Deduction

N/A

$0

$5,100

Bonus Depreciation Deduction 

 N/A

$25,000 (100% of business use in first year)

Total First Year Expense to Business

$6,100

$25,300

$5,400

First Year Estimated Tax Savings
(at 25% marginal tax rate)

$1,525

$6,325

$1,350

Continued Annual Tax Savings
(at 25% marginal tax rate)

$900

$75

$1,319

First Year Cash Required

$12,200

$18,400

$18,400

**DISCLAIMER: This example includes assumptions for easy comparisons. Consult with your Tax Accountant prior to making a buying decision.

By Club Capital | January 20, 2022 | Tax | 0 Comments

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