- November 15, 2022
- Posted by: Duffin Martin
- Category: Accounting, Consulting, Corporate Taxes
When your business needs a new vehicle, the most common question is if you should buy or lease a vehicle. The decision to lease or buy a vehicle and other equipment is best made on a case-by-case basis, as every business is unique. Many factors play into your decision, and it can be stressful to decide which is best for your particular business. Let’s look at the pros and the cons of leasing vs buying a vehicle for your business.
Difference between Leasing vs Buying
Before we get into the pros and cons of each, let’s understand the difference between leasing and buying. When you lease a vehicle, you obtain the right to use it for a specified time. Your monthly payment covers the cost of depreciation, which means that you’ll likely pay less than you would if you purchased a car outright. At the end of the lease term, you can choose to return the vehicle or buy it for the amount stated in the lease agreement. On the other hand, buying a vehicle means paying for the right to use it without restrictions. If you finance the purchase, your monthly payment goes toward the loan balance and interest to the lender. At the end of the loan term, you become the owner of the car and can do whatever you’d like with it.
What is better fit for your business?
The leasing vs. financing decision depends on several factors such as your budget, your expected mileage per year, how long you plan to keep the vehicle, etc. The decision on whether leasing or financing a car is better for you is dependent on your priorities and your business’s financial goals. What is the right decision for one person may be the wrong decision for another if careful consideration is not taken when making this decision. Everyone’s situation is different so keep in mind that there isn’t always a perfect answer to this question.
Leasing would be ideal if your business requires a new car every few years. You will have a lower monthly payment and require less financial commitment upfront. Since most new vehicles have at least three years of bumper-to-bumper warranty coverage, a leased car promises to be a hassle-free one, with few unforeseen expenses. When your lease term is up, simply return the vehicle to the dealership and move on. Leasing a car also means you’ll be able to upgrade to a newer model more frequently, which would be more complicated and expensive to do when you buy or finance your car. But keep in mind the mileage restrictions and potential excess wear-and-tear charges that come along with leasing. If your business requires long road trips, leasing might not be right for you.
If your business prefers to be in total control when it comes to your vehicle and finances, buying might be best for you. You won’t have to worry about mileage restrictions or possible additional charges for things like wear and tear. Your business can personalize your car and drive the vehicle for as many kilometres as you desire. Unfortunately, financing may entail unanticipated costs for repairs after the warranty’s expiry and potentially higher monthly payments, affecting cash flow. Contrary to leasing a car, buying a car is ideal for those businesses who usually drive more miles than the average, generally enjoy keeping cars longer-term, prefer to pay off their purchase in full, and typically have more stable vehicle needs.
Business owners are exposed to various tax advantages, including the tax benefits of using their vehicles for business purposes. As such, this plays an essential factor in deciding whether to buy or lease a vehicle.
When you purchase a car (new or used) for $30,000 or less before GST, you can deduct 15% of the cost in the year you buy the car and 30% of the declining balance for every year after that. Based on this formula, eventually, you will claim 100% of the cost of your car. If you purchase a car for more than $30,000 you will not be able to make a claim on any excess amount paid. However, if you have a loan on the car purchased, you will be eligible to deduct the interest paid on the loan to a maximum of $300 per month of interest charges.
If you lease your car, you are able to deduct the monthly lease payments so long as they do not exceed $800 per month plus GST. In rare cases, it may be lower but in general, CRA sets the limits to ensure that the level of deductions for leased automobiles is similar to that for purchased ones. The downfall of leasing a car is that the initial down payment you make is not deductible in one lump but rather spread out over the life of the lease and therefore becomes part of the monthly lease payment.
The decision on which method of purchasing a car is better, as mentioned above, depends on the business needs as both options have their advantages. If you have any questions regarding buying or leasing a vehicle for your business or want to connect with DM Tax to discuss your circumstances, please feel free to contact us.