This has always been a question accountants are asked no matter what the status of the economy. The problem here is there is no right or wrong answer, it all depends. As the monthly costs become more attractive with lease payments and the urge to keep up with the new technologies and safety features, people are becoming more interested in leasing vehicles, then again, as interest rates on car loans are becoming more attractive (based on credit ratings) more and more people want to buy their vehicles.
Some key items to ask yourself when deciding whether to buy or lease a business vehicle would be:
- Number of miles driven – company vehicles tend to be driven more per year; lease companies often charge extra if the vehicle is driven over 10,000 or 12,000 miles/per year.
- Length of ownership – do you intend to keep the vehicle till it no longer moves or do you prefer to purchase a new vehicle every 3-4 years in which case a leased vehicle would be a better deal.
- Monthly payment – lease payments are usually quite a bit less than monthly car loan payments.
- Total cost of buying vs. leasing a vehicle - calculating the cost of a vehicle would include knowing the MSRP, negotiated price of the vehicle, down payment (if required), lending rate and the residual value (value at the end of the lease). Calculating the total cost of a purchased vs leased vehicle is an article in itself.
The tax benefits are similar when it comes to an owning vs. leasing a vehicle, however there a few key points to remember. The standard mileage rate (where you take the business mileage times the rate the IRS has set for the tax year, 53.5 cents per mile for 2017 and a few additional expenses incurred) or actual expenses can be deducted in either case. However, with a leased vehicle if the standard mileage rate is chose to be used the first tax year, it must be used for the life of the lease. If the vehicle is purchased, the standard mileage rate can be used in the first year and switch back to actual expenses in a later year if it becomes more favorable for the owner of the vehicle.
Since the vehicle is not owned with a lease, depreciation is not deductible but the lease payment is. The one hitch here is the tax code puts a depreciation limit on “luxury” cars, but it also puts a limit on the lease payments by using the “lease inclusion amount” and reduces the deductible lease payment. The higher the original value of the vehicle, the greater the amount.
As the price of the car goes up, leasing usually becomes more preferable. But, remember the interest on the car loan is deductible.
The last item of difference between buying vs. leasing a vehicle is when the vehicle is disposed. If the vehicle is owned, there may be a taxable gain or deductible loss. The portion of the gain that relates to depreciation would be taxed as ordinary income. When the leased vehicle is returned, no taxable gain or loss is incurred.
About the author
Joe is a 2004 graduate of Mount Saint Mary’s University, with a bachelor’s degree in accounting. He is also a 2000 graduate of Archmere Academy in Claymont, Delaware. Joe started with the firm in 2002 as a part-time intern, joining full-time in 2004.
Since then, he has worked with a myriad of clients, including entrepreneurial firms, agricultural businesses and nonprofit entities, including those with OMB A-133 audits. Joe, along with the firm, contributes to Toys for Tots, Goodwill Industries, as well as several other community organizations. He is a member of the American Institute of Certified Public Accountants and the Delaware Society of Certified Public Accountants.