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Is it Better to Buy or Lease a Car for Business?
Table of Contents
You need a new company car. Should you buy or lease? Generally speaking, a lease is preferable if you only expect to use the vehicle for three years or less, won’t put excessive mileage on it and don’t want to make a large financial commitment upfront. If you think you’re going to keep the vehicle for at least five years and your budget allows for it, buying it outright could be the better option. Before making the decision, you should be aware of the pros and cons of each option. It is helpful if you can answer some simple questions about how you plan to use your car before you decide the best way to go.
How to decide if buying or leasing a car is best for you
It truly depends on your circumstances if leasing or buying is the right option for you. To make the best decision possible, there are some questions you should answer for yourself. Once you answer those questions, you should weigh the pros and cons of each option. When you have answers to all of these, it should make the choice much easier for you.
1. How many miles do you anticipate putting on the vehicle?
You need to understand how far you will drive the car and how many miles it will rack up. Leases typically come with an allowance of 12,000 miles per year. This means that when you return the car, it must be at that or under. If you lease the car for three years, at the end of the lease, that is 36,000 miles. Some leases allow for a little more, such as 15,000 or a little less, 10,000. If you go over the mileage allowance, you are charged a certain rate per mile. This is an important consideration because it can get expensive quickly.
2. How much money do you have for a down payment?
Another consideration when determining if you should lease is knowing how much money you have for a down payment. Typically, when you lease a car, you can have less money to put down when you sign the contract. Some leases do not require you to put any money down when you lease the car. The less money you have as a down payment means that you have a higher monthly payment. Even with a slightly higher monthly payment, the lease payment is still lower than the payment when you finance a car. Many advisors tell you that you should put the lowest amount possible for a down payment when you are going to lease a car. When you are financing a car, you want to put more money into a down payment. This will help to decrease your monthly payment.
3. How will you use the vehicle?
When using a leased vehicle for business purposes, a leasing company may dictate when and how you use it. You may be limited in the areas in which you can drive. This may not be a huge concern as you may not need to drive to those areas, but you should be aware before you enter a lease. You should also make sure that you can use your leased vehicle for business. If you are considering using your vehicle for a job like Uber, you want to verify that you can use your lease in this way. Some leases will not allow it at all. Some others give you strict mileage requirements, which make it expensive for you to use your car in this way. If there is a lot of wear and tear on the inside of the car, you will have to pay for it when you turn your car in at the end of the lease.
Car leasing advantages and disadvantages
Advantages
Tax advantages | Monthly lease payments are tax-deductible as a business expense. |
|---|---|
No maintenance or repair expenses | Regular maintenance is covered as part of some leases. |
Easy turnover | You return the vehicle at the end of the lease, with no worries about selling or otherwise disposing of the asset. |
Lower monthly payments | Generally, leases have slightly lower monthly payments than financing on an outright purchase. |
Car leasing payments are typically more affordable than installment-based purchase plans.
Disadvantages
Mileage limitations | Most leases limit driving mileage to 12,000 to 15,000 miles a year. If you’ve driven more than 30,000 miles at the end of a two-year lease, for example, you could be charged an additional 18 to 25 cents per mile over the limit. |
|---|---|
You get what you get | Leased vehicles generally can’t be customized. |
Beware of the small print | There may be additional charges incurred for things like early termination of the lease and excessive wear and tear attributed to careless driving habits or improper maintenance. |
With a lease, you also need to be aware of the residual value or the amount you have to pay at the end of the lease that represents the appraised market value of the car if you have an option to buy. Generally, the higher the residual value, the lower the monthly payments and vice versa. You pay the residual value even if the car is appraised at a lower amount at the time the lease ends.
>> Learn More: The Top 10 Cars for CEOs
Advantages and disadvantages of buying a car
Advantages
You own it | You can sell the vehicle and recover some of your original investment. You can drive it as much as you want without worrying about exceeding mileage limitations. |
|---|---|
Customization | It’s your vehicle; you can add whatever options or custom paint jobs you want. |
Tax advantage | The cost of the vehicle is a depreciable business expense. Also, certain hybrid and electric vehicles may be eligible for tax breaks. |
Make sure you are accounting for your business vehicle on your taxes. Business vehicle costs are tax-deductible.
Disadvantages
Larger capital outlay | Even if you finance, monthly payments are frequently higher than with leasing. |
|---|---|
Maintenance and repairs | While many new cars provide “free” service for the first three years or a certain number of miles, beyond that you bear these expenses. |
You sell it | When it’s time to phase out older vehicles, you take on the hassle of selling, trading in or otherwise disposing of the asset. |
Should you buy or lease a company car?
You should buy a company car if:
- You’re a large company that is looking for day-to-day vehicles used without restrictions for their fleet.
- Your company intends to customize the vehicles to suit operational needs, such as adding a custom logo or specialized features.
- Your employees are rough on company vehicles and would cause noticeable wear and tear.
You should lease a company car if:
- You’re a small company with a tight budget looking to make smaller monthly payments.
- You’d rather not be responsible for the costly maintenance of the vehicle.
- You will use the vehicle infrequently or to travel short distances.
- You want a cost-effective way to use higher-end cars that implement the newest technology and safety features.
Business car leasing vs. buying FAQ
Different business car leasing companies will likely have different qualifying terms, but the general application procedure looks roughly the same across the board. To start, check your personal and business credit reports to ensure there’s nothing present that would make car lenders raise a red flag. You’ll also need to gather your business tax returns and your most recent balance sheet and income statement.
Even with these documents, there’s a chance your company’s application will be rejected. However, your chances of approval increase if you have assets you’re willing to put up as collateral. If your credit report shows glaring gaps, including this collateral in your application can be the make-or-break factor in getting approved.
Yes, a business can lease a secondhand or used car. Certain car leasing companies, such as Carvana, offer used car financing options tailored to small business owners. However, it’s generally easier to find leasing options for new vehicles.
In theory, any business owner can buy a vehicle under their company name. An exception exists for sole proprietors, who can only buy cars through their personal finances under their legal name. However, a sole proprietor who registers as a limited liability company can then buy a car through their company name. Additionally, a sole proprietor who buys a car under their own name and uses it primarily for business may be able to claim several vehicle-related tax deductions.
There’s no right answer to offering a company car vs. an allowance — it all depends on your business’s needs and circumstances.
Offering a company car is beneficial for employees who travel for work frequently. You can use company cars as a perk to attract and retain talent, plus businesses can receive tax benefits for offering them. However, employers incur all costs associated with the vehicle, including auto insurance, which can have varying deductibles depending on policy, maintenance and travel bills.
>> Learn More: Commercial car insurance laws by state
FYI: When providing company cars, businesses must implement fleet management strategies to ensure each vehicle is safe and suitable for employee use. Fleet management software can help businesses keep track of their vehicles, equipment and drivers. [Related article: Best GPS Fleet Management Services]
Businesses that don’t require the frequent use of a vehicle fleet will likely find that a car allowance for employees may be the better — and simpler — option. With a car allowance, employees can use the vehicle of their choice and receive a monthly stipend or other reimbursement to offset costs. However, this option can lead to higher tax costs and under-compensated employees depending on how much traveling and maintenance is required.
Depending on the utilization of the vehicle, a business may be able to receive a tax deduction on its entire operation and ownership costs. However, this is only possible if the car is solely used for business purposes. Should you use the vehicle for both business and personal use, only the business use costs may be deducted. You can use the standard mileage rate method or the actual expense method to calculate your deductible car expenses.
Sean Peek contributed to this article.
