Getting a new vehicle for your business – should you buy or lease?
The decision to buy or lease a new vehicle for your business depends on various factors, and there is no one-size-fits-all answer. When comparing the two options for tax purposes, it needs to be an apple-to-apple comparison. In other words, you should compare the cost of buying or leasing the same vehicle, so the tax benefit analysis is not misleading. There are also qualitative considerations based on the owner’s personal preferences. Here are some factors to consider:
Buying:
Ownership: When you buy a vehicle, it can be recorded as an asset on the company’s books if the business use percentage is greater than 50%. The business use percentage is business miles to total miles.
Deduction methods: If the vehicle’s business use is greater than 50%, the business can deduct actual costs (including depreciation and interest) or take the standard mileage rate published by the IRS. If you use the standard mileage rate method in the first year of business use, you can switch to the actual cost method in future years. If the actual cost method is used in year 1, it must be used for the life of the vehicle. When the business use percentage is below 50%, only the standard mileage rate method can be used.
Depreciation: If your vehicle business use is greater than 50%, you can take advantage of depreciation less any personal use. There are also options to expense a larger portion of the cost or take bonus depreciation in year 1. The allowable amount of bonus depreciation is being reduced starting in 2023. The size of the vehicle can also limit the amount of the deduction in year 1.
Leasing:
Lower Initial Costs: Leasing typically requires a lower upfront payment and may not involve a substantial down payment, preserving your cash flow.
Tax Deductions: Lease payments and related actual costs are fully deductible subject to the personal use limitation (based on mileage). Since you do not own the vehicle when you lease it, there will be no asset on the books and no depreciation deduction.
Newer Vehicles: Leasing allows you to drive a newer vehicle with the latest features, potentially reducing maintenance costs and satisfying personal preferences. You also do not have to worry about selling or trading in the vehicle when you're done with it; you can simply return it at the end of the lease term.
Other Considerations:
Usage: If you primarily use the vehicle for business and expect to put a lot of miles on it, buying may be more cost-effective due to depreciation. Leasing is often better if you have low mileage needs.
Recordkeeping: tracking your miles is crucial to supporting any vehicle related deductions when there is personal use. The IRS requires logs to be maintained in a timely manner. There are various phone apps that can be used to satisfy the IRS substantiation requirements.
Long-term Goals: If you plan to keep the vehicle for a long time, buying is usually the better option. Leasing is a good choice if you prefer driving a new vehicle every few years.
Ultimately, the decision should align with your financial goals and needs.
It is advisable to speak with a tax professional or CPA who can analyze your specific circumstances and help you make the most informed choice.
