Should your business lease or buy your next vehicle?

October 28, 2024 | by Atherton & Associates, LLP

Navigating the decision to acquire a vehicle for your business isn’t as simple as choosing a color or model. The more critical dilemma often boils down to whether you should lease or buy. As a business owner, this choice transcends just finances, as you will need to consider the tax implications and your long-term plans as well.

You can’t always expense a vehicle

Before we dive into the lease vs. buy considerations, it’s important to understand that you can’t always expense a vehicle. If your vehicle is never used for business purposes, you can’t claim it as a business deduction, regardless of whether you lease or buy. Likewise, if you use a vehicle for personal and business use, your personal use will limit your deductions.

A universal perk, though, is the ability to deduct business mileage, as this applies to both leased and purchased vehicles, as well as those you already own.

Leasing basics

Leasing is akin to having a long-term rental car. While this might lower your monthly payments, there are also strings attached. A lease is a contract, and, like all contracts, any missteps will cost you.

First, most leases have caps on mileage, and exceeding these limits can result in costly penalties. For instance, many leases have a limit of 12,000 – 15,000 miles over the course of the term, so if you plan to cover a lot of ground, a lease may not be practical.

There’s also the matter of wear and tear. Vehicles naturally accrue some light scratches and dings from ordinary use. However, with a lease, there’s a fine line between acceptable wear and what’s deemed excessive. At the end of the term, if the lessor determines that the vehicle has been damaged beyond normal wear and tear, it could result in additional fees.

Regular maintenance may also be bundled into your lease payments, which is often a perk, but where you service your vehicle may be non-negotiable. For some brands, DIY maintenance or visiting your local garage may be off the table. Instead, you could be tethered to authorized dealerships, which may be inconvenient in certain circumstances.

In a nutshell, it’s imperative to scrutinize the fine print on any leasing agreements. Your initial savings can be offset by additional fees if you breach any terms of the agreement.

Preliminary considerations

Leasing and buying a vehicle both present unique considerations.

Leasing: 

• Typically demands a smaller downpayment and lower monthly payments.

• You can upgrade your vehicle more frequently, as most lease terms last 2-3 years.

• At the end of the term, you can simply return the vehicle without worrying about the complexities of a resale.

• Insurance premiums may be more expensive, as full coverage is often required.

• Mileage limits and wear-and-tear clauses can lead to additional fees.

Buying: 

• Every payment brings you closer to owning the vehicle outright.

• You’re free from mileage limits and can customize the vehicle as you see fit.

• You can recover some costs by selling the vehicle later.

• Purchasing often requires a larger down payment and higher monthly payments.

• You’re responsible for all maintenance and repair costs.

Tax deductions

For both buying and leasing, the IRS allows deductions for business use of a vehicle. However, the nature and extent of these deductions vary.

Leasing: straightforward but limited

Leasing’s beauty lies in its simplicity, especially when it comes to deductions. If you use the leased vehicle exclusively for business, you can deduct the lease payments in full. If you occasionally use the vehicle for personal reasons, you can still deduct the business portion of your lease payments – just keep meticulous mileage logs and documentation. For instance, if you drive a total of 10,000 miles in a year, and 7,000 of those are for business purposes, you can claim 70% of your lease payments as a business expense.

Yet, leasing isn’t without limitations. One notable setback is the ineligibility for depreciation deductions, which can be substantial.

Buying: greater deduction potential

When you purchase a vehicle for your business, you’re not just acquiring an asset; you’re potentially unlocking several tax deduction opportunities.

One of the most notable perks of buying is the ability to tap into depreciation deductions. You have the option to claim an upfront 100% depreciation by taking a Section 179 deduction, although you cannot deduct more than your business’s net income for the year. To enjoy this benefit, however, the vehicle’s weight must fall between 6,000 and 14,000 lbs., and it must be used for business purposes more than 50% of the time. If your vehicle does not qualify for the Section 179 deduction, you may still be able to claim bonus depreciation; however, the value of this deduction started phasing out in 2023.

The advantages of purchasing a business vehicle don’t stop at depreciation. If you’ve chosen to finance your vehicle purchase, the interest paid on the loan is also deductible.

For businesses eyeing environmentally-friendly vehicles, you may also be able to claim the Clean Vehicle Tax Credit. For brand-new vehicles, this credit can slash your tax bill by up to $7,500. If you’re considering a used vehicle, you can claim the lesser of $4,000 or 30% of its sale price. However, it’s vital to note that this credit is subject to several limitations, so you’ll need to determine that a vehicle is eligible before claiming the tax credit.

Hybrid approach

A hybrid approach may enable you to experience the best of both worlds. Some businesses find merit in leasing a vehicle at first, then buying it out at the end of the lease term. This approach offers initial flexibility, lower upfront costs, and an eventual asset.

This approach will probably make the most sense if:

• You’re uncertain about a vehicle’s long-term suitability

• Your business travel needs are initially limited, but you project an uptick in business-related travel in the future

• The lower monthly cost of leasing is attractive now, but you plan to own a vehicle as a business asset in the future

Consult with our experts

Deciding whether to lease or buy a vehicle for your business is a significant decision with long-lasting implications. While this article offers a general overview, the optimal choice depends on your specific circumstances, financial situation, and business goals.

For personalized guidance tailored to your unique needs, please contact our office.