If you are a business owner and require a vehicle to carry out day-to-day operations, leasing a car may be a good idea. Leasing a car through your business can reduce lower upfront costs and helps you upgrade frequently without hassle. Visit eAutoLease.com to find out more about leasing, how it will benefit you as a business owner, and what you can do to enjoy more benefits in the long run.
Read more: Car Leasing Guide: How to Lease a Vehicle
Important Lease Terms You Need to Know
Residual Value
Residual value describes the car’s worth at the end of the lease, depending on the amount and rate of depreciation on the car. The longer the term of the lease, the lower will be the residual value as the vehicle is older when you return it.
Term length
Short-term leases are costlier than long-term leases as the residual value goes down faster in the first 24 months. Negotiating a longer lease will generally lead to a lower monthly payment but deciding to end a longer lease before time can be costly.
It is essential to match the term of a lease to your business needs. If a company car is used frequently and traded in regularly, your best option might be a shorter-term lease.
Estimated annual mileage
Before signing a lease contract, you will need to come up with an estimated annual mileage for using the car. A typical lease may have a 12,000-mile annual limit, but if you are buying for business and think you will use more miles, it is best to pay extra for the additional mileage. Failing to do so and utilizing more miles will result in paying extra costs at the end of the lease.
Read more: Is Buying Out Your Auto Lease Right for You?
Who Can Deduct Business Driving Expenses?
Business car leasing can lessen the upfront costs of getting your employees behind the wheel. A small business can deduct expenses for driving a car that is owned or leased, but only for business expenses. Your business can deduct lease costs and driving costs. You may also be able to depreciate the lease costs, depending on the type of lease.
Whether you are buying a car or leasing it for business use, you can only deduct business expenses. Commuting back and forth to work is a personal expense that is not included in it. Employees cannot deduct costs for driving company cars if they are not compensated by their employer as per IRS law.
Deducting Business Lease Costs
Businesses can deduct ordinary and necessary lease costs for a car meant for work use. However, to deduct lease costs and driving experience, you must be able to prove your business mileage and that the car was driven more than 50% of the time for business use.
There are two types of leases for tax deduction purposes, depending on the type of contract:
- You can deduct the payments as rent if the agreement is a true lease
- You must depreciate the cost over time if the lease is really a conditional sales contract
Deducting Driving Costs
There are two options for deducting driving costs for your leased company car. The options depend on whether you use the actual costs of the standard deduction for the year. You may deduct business driving costs for a leased car under certain circumstances and within limits.
You must use the car 50% or more of the miles for business purposes and also prove the amount of business driving each year. To deduct the lease payment, you must use the actual expenses method to calculate driving deductions. A higher-value leased vehicle may be subject to what is known as an inclusion amount, which is a reduction in the deduction for the lease cost.
Do not forget the sales taxes for deduction purposes. Check with your state to find out if you have to pay sales tax on vehicles leased for a year or more. The lower the vehicle cost, the lower will be the sales tax rate.
Buying or Leasing a Car for Business – Which Is a Better Option?
More than anything else, the specific circumstances of your business will determine if you should buy a car or lease it.
However, there are some points to consider:
- Monthly lease payments are usually less than monthly loan payments. It is because lease payments only include depreciation, interest, taxes, and fees.
- You will have to pay excess wear and tear costs for a leased car. However, the condition of the vehicle is considered part of the fair market value of a purchased car.
- You can deduct business mileage for leased as well as purchased vehicles, but there may be some restrictions if you use actual mileage for leased cars.
- The main difference between leasing and buying a company car lies in your ability to depreciate the car cost. You can always depreciate the cost of a purchased vehicle, but some types of leases do not allow depreciation.
How Does a Company Car Lease Work?
The lease agreement specifies the monthly payments and other charges, the terms of the lease, and the number of miles included in the lease price. You may turn in the lease at the end of the term, but you buy the vehicle if the option is included in the lease agreement.
If you end the lease early, you may have to pay a prepayment penalty. The amount of penalty depends on how early you end the lease. Your business or company is responsible for the use of excess miles. In case there is excess wear and tear, as defined by the lease agreement, you will have to pay those as well.
The decision to lease a car depends on your priorities and ability to consider all its pros and cons. Leasing a car for your business gives you a chance to make lower payments every month and also enjoy a new car after every few years. Check out eAutoLease.com to find out how to make tax deductions if the vehicle usage is related to your business mandate and how you can save more and do better in the long run.
