Placing a Business Car in Service: Buy or Lease?
Placing a car in service in your business provides more than just transportation to and from client meetings. In fact, one of the top business deductions that small business owners utilize is the auto deduction. This leaves business owners facing a dilemma: buying or leasing? Both methods have advantages and disadvantages that need to be considered to make the right decision for your business.
The Pros and Cons of Buying
Buying a business vehicle does come with its share of advantages. First, you are able to make payments toward owning the asset if you don’t have the capital to buy the vehicle outright. Additionally, interest expense is a qualifying business deduction when you purchase a vehicle.
The CRA allows you to take a percentage deduction over the course of the vehicle’s useful life in depreciation. This can significantly reduce your tax burden. The Capital Cost Allowance is based on the vehicle’s purchase price, class, and business use.
There are disadvantages to consider as well. First, you are liable for all repairs and maintenance since you own the vehicle. Luckily, these expenses do qualify as a business deduction. Moreover, when you dispose of the vehicle, you may be required to pay capital gains tax and recognize depreciation recapture rules.
The Pros and Cons of Leasing
The other option for placing a business vehicle in service is leasing. A lease works like a rental where you make regular payments, but don’t own the asset at the end of the lease term. An advantage of choosing the leasing method is that you generally aren’t on the hook for major repairs since the dealership still owns the car.
Lease payments are deductible based on the business use percentage. Let’s say you only use the car 75% of the time for business and your lease payment is $1,000 per month. You would only be able to deduct $750 per month. Like buying a vehicle, gas, parking, and tolls are all deductible.
One of the top disadvantages of leasing is the depreciation deduction. You aren’t able to take any depreciation on the vehicle since you don’t own it. This can be a major tax disadvantage depending on the vehicle’s purchase price.
Choosing the Right One
Choosing the right method takes consideration of different factors. First, analyze the purchase price versus the lease price. Buying an expensive vehicle will come with greater interest and loan costs while leasing might be more cost-effective for your business.
Also, consider how long you plan on keeping the vehicle. If you only plan on having the vehicle for a couple of years, leasing might make more sense to avoid capital gains taxes. The mileage you drive each year will also help you make your decision.
Choosing between buying or leasing a business vehicle takes multiple factors into consideration. You want to be sure you are making the decision that positively impacts your taxable income. To work through your situation with an expert, reach out to the team at NRK Accounting. We can put together a cost breakdown related to your specific situation to help you make the most informed decision. Reach out today for more information.