Investing in a company vehicle is a big step for your business. It’s a reflection of the success of your business and may be the first thing clients see associated with your business. You can either buy or lease the vehicle, but it’s important to carefully consider your options before you jump in. Here are the costs and savings calculations to consider when making your next company car purchase.
What Tax Benefits Are You Looking For?
Generally, you’ll get a bigger bang for your tax write-off buck by purchasing a vehicle outright or with an auto loan. To figure out how much you’ll actually be able to write off, you need to talk to your accountant, but here are some general guidelines. The weight of your vehicle determines your write-off limits. Vehicles under 6,000 pounds, which includes most cars, trucks and SUVs as large as the Chevrolet Tahoe or Nissan Armada, have a significant tax benefit the first year, with some deduction also available in years two and three.
This Section 179 deduction is only available if you use your car for work at least 50 percent of the time. For vehicles over 6,000 pounds, there is a larger initial deduction, and for vehicles over 14,000 pounds, there is no limit on the first-year deduction.
How Luxurious Does the Car Need To Be?
Besides the savings potential, consider how you use your company car. For some businesses, you need a very nice car because it is the representation of your business. For high-end realtors, it’s hard to look like you fit in a million-dollar neighborhood if you’re driving a mid-range vehicle. Leasing almost always allows you to get a more luxurious vehicle than buying outright. You then have the opportunity to change to the newest model every few years. In exchange, you’re giving up part of your tax benefits. With a lease, you can either deduct the cost of the lease or you can take a mileage deduction but not both.
How Many Miles Will You Put on the Car?
Another consideration when looking at a new car is how many miles you think you’ll drive each year. Most leases have a mileage limit of 10,000 or 12,000 miles per year. If you’re a realtor, it’s estimated that you could drive as many as 20,000 miles a year for work. That puts you at double the lease limit, meaning you’ll incur significant fees, often more than 15 cents per mile over your limit. If you have a three-year lease, you’re looking at a minimum $4,500 fee when you turn in your vehicle, a fee that’s out of your pocket. When your car and its image are part of your livelihood that may be a price worth paying.
Are You Planning To Purchase a Lease?
Finally, you may be thinking about leasing your vehicle to get a nicer car but then plan on buying the vehicle at the end of the lease rather than return it. The fact is that the total cost of a lease with taxes will always be higher than buying a vehicle outright. If you plan to purchase the vehicle in the long run, you are better off buying it right out of the gate.
The only reasons to lease a vehicle are to get a nicer car than you can otherwise afford and to continually invest in the newest models. One minor benefit of a lease is that at the end you turn the car in, not sell it. Selling a vehicle can impact your business taxes; however, if you take care of your business car, it can serve you for many years and have minimal value when you’re ready for your next new car.
Any time you are looking at a large asset investment like a vehicle, it’s important to check in with your business accountant. She’ll be able to guide you more fully, but these are questions you can answer beforehand and have ready for your discussion.