If you’re deciding between leasing and buying your next business vehicle, the key question is: Which option costs less? The answer isn’t straightforward, as it involves considering cash available, tax benefits, and the time value of money.
The Difference between Lease and Buy
Buy: Ownership after loan repayment, with the ability to sell or trade the vehicle.
Lease: Renting the vehicle, with the option to buy at a predetermined residual value or get a new one after the lease ends.
Cost Calculation Impact
Leasing entails lower upfront costs and often lower monthly payments, providing more available cash. Tax differences, including bonus depreciation, Section 179 expensing, and MACRS depreciation, play a crucial role in the comparison.
Buy:
- Deduct operating and maintenance costs using mileage rate or actual expenses.
- Actual expense method allows quicker deductions through bonus depreciation, Section 179, and MACRS.
Lease:
- Deduct lease costs, including monthly payments and amortization of upfront expenses.
- Tax considerations for leased vehicles include potential deductions and lease reduction amounts.
After-Tax Adjusted Present Value Lease Calculator:
To determine the best option, utilize the After-Tax Adjusted Present Value Lease Calculator. This tool considers your financial details, providing an after-tax result in today’s dollars.
Personal Factors to Consider:
– Vehicle preference: Leasing encourages getting a new vehicle every few years.
– Trust and complexity: Leasing involves closer interaction with the lessor.
– Driving habits: Leases have mileage limits and fees for excess damage.
– Personal stability: Leasing may not suit uncertain family or business situations.
– Status considerations: Leasing allows access to vehicles otherwise unaffordable.
Smart Financial Advice Trumps Tax Advice
While tax considerations are crucial, smart financial advice sometimes trumps tax advice. Buying a car for cash is always a better financial move than leasing. Smart financial decisions, such as avoiding interest payments on financing, contribute to long-term financial health.
Takeaways:
Consider upfront and ongoing costs, tax advantages, and personal needs when deciding between buying and leasing a business vehicle. Leasing offers lower initial costs and improved cash flow, while buying results in ownership and potential resale value. Assess tax advantages, and for a comprehensive financial evaluation, use the After-Tax Adjusted Present Value Calculator. Factor in personal and business considerations, including vehicle preferences, trust in lessors, driving habits, personal stability, and status considerations.
