Is it better to buy or lease a vehicle for my small business?

For many small business owners a pressing question if they need a vehicle (or many vehicles) is should they buy or lease? The actual answer to that is-it depends. There are a number of factors that each small business owner should take into consideration before signing on the dotted line (of either a lease or buy agreement). It is important to understand that buying and leasing both have pros and cons. While we will discuss several of them here it is important to consult your accountant for the specifics of your situation.

The benefits of leasing can be many. Here are just a few:

• The major benefit of leasing for a small business is that it usually takes a smaller cash outlay upfront. This allows you to invest your cash somewhere else in the business. Buying requires a bigger initial payment and then depreciating the asset over its useful life.


• A larger tax deduction on a leased vehicle.


• You can deduct monthly lease payments as rental expenses on your taxes.


• Since a car's value drops fastest in its first few years, leasing is wiser if you do not plan to keep the vehicle for long.


• No maintenance cost as your lease will cover this.


• You can always be seen driving a new car.


• With an open-end lease, you can purchase the car at a lower cost when the lease is up.


• You can pay the sales tax over time and claim a tax deduction for your business.

The downsides of leasing include:

• If you are going to have heavy use of the vehicle you may want to consider buying. Ownership makes more sense if the vehicle will get heavy use. Most leases have a10,000 or 12,000-mile annual limits and after that you will pay per mile, which can add up.


• You do not own the car when the lease is up.


• You must return the car in the same condition (normal wear and tear excepted) as when you had first leased it


• It can be very hard and/or costly to terminate the lease early should you no longer need/afford it for your business.

The benefits of buying can include:

• There is a new tax development that may favor buying a vehicle. In order to push drivers to think green, the IRS is offering one-time tax credits to buyers of clean-fuel-burning cars and trucks. Since the deal is open only to "the original purchaser of a new, qualifying vehicle," if a qualifying vehicle is leased, the leasing company may claim the credit. These credit which while substantial must be balanced against a hybrid's higher cost.


• You actually own the vehicle when it is paid for. You can customize or accessorize the vehicle as you choose.


• There are no mileage limits or other restrictions.


• There are some manufacturer incentives which can make purchasing more affordable. You can also sell when you choose to or use the car as a trade in when you purchase a new car. Although the car will depreciate in value, you should still have a salable asset.

The downside of buying a car:

• You should keep in mind that repairs are your responsibility, which means they are on your bill once the warranty runs out.


• The sales tax is due immediately upon purchase.


• Monthly loan payments can be higher than leasing payments once again tying up valuable needed cash for your small business.

If you do opt for leasing, it is crucial that you make sure you read the leasing agreement carefully and look for additional costs. If you decide to buy vehicles for your small business, do your homework and make sure you know what to expect in terms of price and standard features.

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