If you’re a small business owner who relies on a car or truck for your livelihood, you realize the question of whether to lease or to buy is no small concern. In fact, the decision can involve tens of thousands of dollars of your company’s hard-earned revenue, and making the right choice could have a significant impact on your bottom line. There is no one-size-fits-all answer, but all entrepreneurs should be aware of the underlying factors that go into that decision-making process.
If your small business would have to finance the purchase of a new vehicle, you need to compare how leasing and buying affect your monthly cash flow:
- In nearly all cases, lease payments are going to be lower than those for an auto loan, meaning lessees will face lower monthly expenses.
- Lease payments are tax-deductible based on the percentage of miles the vehicle is driven for business purposes, while deductions for vehicle purchases are primarily handled through the depreciation process (although the business-use percentage of loan interest can also be deducted). In most cases, depreciation must be spread out for more than a decade.
Naturally, the tax code has certain limits and restrictions, and those are best discussed in detail with your financial advisor.
Going Beyond the MSRPs
Along with the cost of acquiring the vehicle, there are a few other financial effects to consider:
- For a lease, automakers usually attach strict annual mileage limits to the vehicles, complete with penalties should you exceed them. Because the dealership still owns the vehicle and will have to sell it once the lease has expired, it is looking to get the car back in the best, least-used condition possible.
- For the same reason, vehicle damage, or even routine wear and tear, can lead to added fees at the end of a lease: While you might live with a small, barely noticeable ding in a work vehicle you own, the dealership will want it fixed, and for you to pay for the repair.
- When you own a vehicle outright, you may have the option to save money by reducing insurance coverage.
The end of a lease or loan also brings another difference. With most leases, the vehicle is returned to the dealership without any strings—once you cut through any of the above issues—and you’re free and clear of any further responsibility. When your small business owns the vehicle outright, you need to handle disposing of it at the end of its lifecycle (although your business also reaps any profit from a sale).
Intangibles of Interest
Money may be a crucial factor when trying to determine if you should lease or purchase a vehicle for your small business, but it shouldn’t be the only one. For instance, building awareness and a good reputation can be a great help to your company, and in some common scenarios, the right car can be key. Say you’re in real estate: Do you want to show homes, sometimes taking clients from house to house, in an older vehicle that may be not be in top condition?
When you lease, it will be much simpler to update your ride on a regular basis, gaining access to the latest automotive technology at the same time. This can have real benefits, too, along with helping your small business make a good impression. With automakers constantly introducing new high-tech safety features, going from one model year to the next can mean adding forward-collision warning systems, automatic braking features, lane-keeping alerts and more. More new cars also are adding mobile Wi-Fi and other connectivity technologies, which can be a boon for small-business owners on the go.
You never know what’s coming next, but if you lease, you at least know when your next opportunity to get a new vehicle will be. As you do when you make any other decision for your small business, when you’re choosing a car, figure out the most important factors for growth, and you’ll be on the road to success.
Charles Krome writes for CARFAX about all things cars, and enjoys sharing insider tips about car buying with business owners and consumers alike.