Should You Buy or Lease Your New Business Car

You have your own business. It’s going well. You want to show off a bit perhaps and get a car worthy of your new status.  The question is: can you write it off as a tax deduction? 

Before you spend money on that exciting luxury ride, you’ll need to know how to purchase it, how much you’ll be able to deduct, and whether it’s worth it financially. Here’s a quick guide.

Tax Deductions Aren’t Universal

While many people talk about tax deductions as if they apply to every person, accountants will tell you that’s not true. Here’s a case in point. The U.S. gives a $7,500 tax credit to an individual who buys a certain type of electric or hybrid car.  However, many people who could buy that car aren’t eligible to deduct that large amount.  So essentially they can’t take the deduction they were promised when they bought the car.

It’s this sort of scenario that you want to avoid when looking for your new car. An accountant or tax preparer should be able to tell you if it is financially in your favor to purchase a car for the company.  You don’t want to do it and then have an unpleasant surprise when taxes are due.

Buying vs. Leasing

While individuals tend to want to buy their new vehicles, businesses may be smart to just lease them.  After all, you don’t want the expense of repairs when the vehicle matures past its warranty. You want to drive it without worrying if it will break down tomorrow.  

Leasing tends to be within the warranty period. It may be more expensive in some ways, but in others it will save you money on a monthly or yearly basis.  This is a bit like long-term renting, and it can be easier to deduct on your business taxes.

However, there is a school of thought that prefers purchase. This allows both the purchase price and the depreciation of the vehicle to be counted.  

Personal vs Business Purchase

The last consideration is whether you want to make a personal purchase and count it on your personal taxes as a business expense or you want to have it purchased through your business.  It may seem like apples and oranges, but there may be a big financial difference depending on which strategy you choose.

You can’t buy a car for business, taking that tax deduction, and then turn around and deduct your business mileage on your personal taxes.  There are many instances where taxpayers make that sort of mistake, and it can be very costly.  

In another example, you may find personal credit easier than business credit. If you want to save money by purchasing a used vehicle, for instance, you are more likely to find used car in house financing for yourself than for your business. If credit is denied or interest rates are too high, then the business purchase may be out of the question. 

Lastly, when considering whether your car is a business or personal purchase, you need to find out about insurance rates and related factors.  A business vehicle driven by you can leave the business liable if you have a wreck.  A personal vehicle driven by you will not create a liability for the business.

As you can see, buying a car for business is a fun idea, but it requires some thought.  Like any other big purchase, you should weigh all of the pros and cons before signing a contract.