If you need a car to operate your business, you may wonder whether to buy or lease. If your business owns the car you’ll have a long-term asset and may qualify for more deductions. On the other hand, buying is a huge expense, and monthly lease payments tend to be lower than loan payments (and may be tax deductible).
Why buy a company car?
Owning makes the car a company asset with a number of perks: you can write off fuel, mileage and maintenance; interest payments and depreciation may qualify as business expenses; and you may enjoy lower insurance and liability rates. The big con is the major up-front expense of financing a depreciating asset – though you retain residual value as you pay it off and can use the car for as long as it does the job. If you use a personal vehicle for business instead, you may be eligible for itemised deductions.
The pros and cons of leasing
For many small business owners, leasing is more attractive – it usually comes down to cost and cash flow, with no down payment and lower monthly payments. The flip side is that leasing tends to cost more in the end, the payments don’t build an asset, insurance requirements may be higher, and exceeding the mileage limit can mean extra fees. If you drive a lot, leasing lets you upgrade regularly and avoid costly repairs on an ageing vehicle – and lessees can still write off some business-related car expenses.
Final considerations
Before you commit, do a cost-benefit analysis over the loan or lease term – monthly payments including interest, anticipated mileage, maintenance, fuel, insurance and parking, and the vehicle’s value at the end. Talk to your accountant about which expenses you can claim, and about tracking your company car costs accurately so you don’t miss any eligible write-offs and everything is in order if you’re ever audited.