Should Your Business Buy or Lease a Company Car?

When it comes to obtaining a company vehicle, you have a couple of options available to your business – you can opt to either buy or lease. Let’s examine these options in detail.

Buying a car

If you decide to buy a car, keep taxes in mind. Writing off the costs on your taxes can be done in two ways – actual costs or mileage – and there are limits on how much you can take in a given year. If you choose actual costs, you have to do that every year you claim the vehicle; you cannot change your mind later. There are different amounts you can write off depending on the type of vehicle you own, too, whether it is an electric car or an SUV. If you’re looking to invest in a hybrid vehicle for your business, be sure to keep in mind that it will no longer qualify for a tax break.

Leasing a company car

When you decide to lease your vehicle or go for commercial leasing, you gain some tax deductions. For instance, if you lease as a company vehicle and the car is not used for personal use at all, you can deduct your lease payments on your taxes. If you take out an operating lease which generally has tax incentives on your vehicle, you get some significant advantages such as the lack of liabilities being recorded on your balance sheet as compared to a capital lease.

Operating vs. capital leases

There are two types of leases your business can choose from for its company car. An operating commercial lease means the lessee does not own any part of the vehicle and the lessor always holds the title. The business that leases the vehicle gets to claim the full amount as an operating expense. A business using this type of lease does not have to pay taxes on the car. One drawback to this model is that the company cannot buy the car at the end of the lease term. However, this is not a problem if you want to turn in your vehicle and get a new one at the end of each lease.

The other kind of leasing option is called a capital lease. In this case, the lessee is actually part owner of the vehicle. The lessee can claim the interest portion of the payments and the depreciation value of the vehicle on his or her taxes. The vehicle that is leased is not counted as an operating expense, so it has to be put on the company balance sheets on both sides – as an asset and an expense.

Anything else do I need to know?

There are plenty of places you can lease your vehicle from, including car dealerships and specialized leasing companies. A leasing company only leases vehicles to you; while a dealership can help you better decide if you want to turn your lease into a purchase.

Make sure you have the full list of who will be operating the company vehicle when you take out the lease so that the right value of the vehicle and the proper insurance policy can be written and the premium can be calculated. This might mean you pay a bit more for having extra employees, but you actually save a bit more too, instead of having to lease everyone a vehicle. If you do need to lease extra vehicles for your employees, you might be able to negotiate a discount for a fleet of vehicles.

If you think that your business needs a company car, consider leasing your vehicle through commercial leasing. You may also look into reaching out to your accountant for advice on what the best method for your needs and your business will be.

About the author: Teresa Jens is a business marketing consultant based in Aarhus, Denmark who specializes in content marketing and digital branding. About a year ago she started writing for audi.dk.