QUESTION ON Leasing a Vehicle For Business
What is the best solution to purchasing or leasing a vehicle for business? Can you let me know the advantages and disadvantages of leasing a vehicle for business?
– Thomas
Dear Tom,
A home business just starting-up definitely needs all the operating capital that it can hold on. Therefore, to invest much needed capital into purchase of equipment, building, or vehicles could affect other necessities of the business.
By leasing, you can obtain the needed equipment or vehicle without a big capital outlay. You should always investigate the advantages of leasing against purchasing. There are lenders who offer longer term with lower monthly payments compared to that if you purchased the equipment or vehicle through a loan.
Unlike loans for purchase, which usually require large down payments, leasing sometimes offer 100 per cent financing. If you have a good credit record, you can even get a vehicle with no down payment. This is the point where you save your cash for something else while you drive your new vehicle out of the dealership. However, in the long run, leasing will cost you more, although it can help you out effectively during your start-up period.
Here are some advantages of leasing:
- Minimal cash outlay – You can acquire your vehicle with 100% per cent financing.
- No obsolescence – You can negotiate for a short-term lease and change the vehicle with a new model at the end of the lease contract.
- Tax advantage – (Check with your accountant). If specifically used for the business, you can claim mileage deductions from your income tax.
- Deductible payments – You can deduct the business percentage of your lease payments
- Flexibility -You can spread the lease over longer periods than a loan, thus reducing the monthly payments.
- Disposal – when you return your leased car to the dealer, there is no taxable gain or loss
Disadvantages:
- No ownership: The lessor own the vehicle. You have no equity to it, unless the contract has an option to purchase clause.
- Higher cost – Even if the monthly payments are lower, the ultimate cost of the vehicle will be higher than if you purchased it.
- Non-cancel-able lease contract – Some leases have non-cancel-able clauses and charge severe penalties for early termination.
- High Insurance Coverage requirements- Some lessors require very high insurance coverage like $300,000/$100,000 coverage and you pay the premiums as compared to purchase where you can decide the amount of your coverage.
- Depreciation – you cannot depreciate the cost of the vehicle in your taxes
Read pages 23-24 of this IRSÂ Publication 463Â Travel, Entertainment, Gift and Car Expenses
Nach M Maravilla
Recommended Resources on Leasing
- 366 Marketing Tips for Equipment Leasing
- The Complete Equipment-Leasing Handbook: A Deal Maker’s Guide with Forms, Checklists, and Worksheets
- Buy or Lease a Car Without Getting Taken for a Ride (Entrepreneur Magazine’s Pocket Guides)
- Personal Financial Planning (Available Titles Coursemate)
Article originally published in March 2000.
