For small-business owners, putting a personal vehicle into service, and buying or leasing transportation, are all legitimate alternatives. Regardless of which direction you take, financial aspects, such as insurance or tax deductions, need deliberation with a qualified professional. This is a short list of essential considerations for you concerning your company vehicle.
Deciding whether to lease or buy a vehicle is worth investigating. Purchasing a vehicle provides tax benefits, such as depreciation, while a lease typically doesn’t have the same advantage. Tax codes allow Business owners to claim business vehicle-related costs on their Federal Tax Return or, if they use the vehicle for a mix of business and pleasure, they may deduct the appropriate business-related portion. Tax codes, in both cases, allow deduction of vehicle expenses that you incur each year such as gas, oil, maintenance, and repairs. Expenses eligible may include licensing, tolls and depreciation, which complicates the decision, making it worthy of careful thought.
If you bought a car for your business, you could deduct loan interest based on the percentage of vehicle use that is for business. You might also be able to deduct up to the depreciation deduction allowed if your business use is more than 50%. For instance, if you purchased an SUV this year, you could deduct up to $25,000 of the vehicle cost.
As vehicles become more expensive leasing is often a better choice.
While you are not allowed to depreciate a leased vehicle because you do not own it, you can deduct a percentage of your lease payments. If your lease payment is $500 a month, $6000 a year, and your business usage is 70%, you are able to deduct $4200 on your tax return. Keep in mind that the tax code limits depreciation on “luxury” vehicles and limits the lease payment deduction on expensive cars.
It is critical to consider how long you intend to keep the vehicle. Many businesses put a lot of miles on their cars and replace them often. If you plan on switching vehicles frequently, a lease might be a good option for your company, but you must factor in the mileage ahead of time. Running over on miles is expensive if not built into the lease, but high mileage can also hurt the value of a vehicle that you buy.
When determining whether to lease or buy consider the total cost of the vehicle over the length of time you plan on keeping it. Analyze the costs for both options including expected miles driven, maintenance, and upkeep. It is also important to consider how your decision will affect your cash flow. The up-front costs are different with leases often requiring the first-month payment and a security deposit as opposed to buying, and making a down payment, so these variations, along with other factors, need consideration on a case-by-case basis.
To learn more about company vehicle deductions or anything else contact us today.
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