Dear Client:

Buy or Lease a Business Vehicle: Which Costs Less?

If you’re trying to decide between leasing and buying your next business vehicle, this question is probably foremost in your mind; Which option costs less?

Unfortunately, comparing the costs of leasing and buying isn’t as simple as it looks. To do it right, you must consider not just out-of-pocket costs but also cash available, the tax benefits of each option, and the time value of money.

The Difference between Leasing and Buying:

When you buy you own the vehicle free and clear after you repay the loan.  So, you get the trade-in or sale value of the vehicle when you decide to get rid of it. When you lease, the dealer or leasing company owns the vehicle, and you pay for its use over the lease term.  When the lease ends, you can either buy the vehicle for a “residual value” stated in the lease or walk away and get a new vehicle.

So, the impact on the cost calculation involves lots of variables.  Leasing requires less money up front and often lower monthly payments. Consequently, leasing leaves you more cash. That’s an advantage you must account for in your cost calculation.  Another key factor in the comparison is how much you can save on taxes using each option. The key tax differences could involve bonus depreciation, Section 179 expensing, and MACRS depreciation.

If you buy your vehicle and use the vehicle in your business, you can deduct the cost of operating and maintaining it using either a pre-determined mileage rate set by the IRS (which for 2024 is 67 cents per mile, and that 67cents includes 30 cents for depreciation), or your actual expenses (operating expenses plus depreciation and Section 179 expensing).

The actual expense method gives you your deductions quicker than the mileage method because, depending on the type of vehicle, you can claim the following:  bonus depreciation,

section 179 expensing, and MACRS depreciation

You can also use the mileage rate or actual costs to deduct vehicles you lease. The actual cost deduction for business vehicles you lease consists of monthly lease payments, amortization of down payment and other up-front costs, and lease reduction amounts for luxury vehicles, if applicable.

So How Can We Help:

How can you absolutely know whether it’s better to buy or lease?  Well, the quickest way is to call us, and we can enter your numbers and calculate the cost of each scenario.  We can also factor in the after-tax adjusted present value method which takes the money you pay out and the money you collect and values that money in today’s dollars so you can make a true comparison.

So, to calculate the time value of money, you start with this question: what is your safe rate of investment return after taxes? With that number, the calculator values the cash intake and outlay and makes the comparison.

Other Considerations:

There are many other intangible considerations that can factor into your decision.  How often you want a new vehicle—leasing gives you a big push to get a new vehicle every three years or so, when the lease ends.  How much you drive—leased vehicles are subject to mileage limits as well as fees for excess damage, which may be a major bummer if you plan to drive the vehicle a lot and treat it roughly.  Cash Flow considerations.  Generally, a lease takes less cash flow for the first few years of ownership.  You may have significant cash flow needs and that may be a big advantage.  However, buying generally results in higher depreciation deductions in the first year, so that may be of significant advantage.



It is a complex question, but one that most businesses think about.  Please don’t hesitate to contact us if we can help you consider weighing your options on your next vehicle.

Regards,

Larry Filener, CPA

Larry Filener, CPA

Southwest Accounting Pros, LLC