Is It Better to Lease or Buy When Self-Employed?

Most entrepreneurs use their cars for business purposes, especially at the initial stages of business. However, as your company continues to grow, there comes a time when buying or leasing a separate business vehicle is necessary. A car can make running your business easier than ever, from moving errands to doing deliveries.

Nevertheless, deciding whether to lease or buy a car for your business can be challenging. You have to find the right balance between short-term affordability and long-term economic benefits. So, should you lease or buy a car when self-employed? Read on to learn what is best for your business.

Leasing vs buying: Factors to consider

There are a few essential factors to consider when determining whether to lease or buy a car for your business. These include:

Car payments

A larger down payment can give you a financial perk by lowering your monthly payment if you lease or buy a business car. However, leasing a car might not be the best option if you don’t have enough cash for a sizeable down payment. Fortunately, car lease agreements usually require less money for a down payment compared to car sales agreements. Furthermore, some car leasing companies don’t ask for any down payment.

The greatest advantage of buying a business car is that you won’t have any monthly payments to make after you have paid off your auto loan. At this point, you will only have to pay for gas, routine maintenance, and insurance. You can use an online auto loan calculator to determine how much your potential car loan payments will be.

Maintenance costs

How you will handle your car’s maintenance depends on whether you buy or lease the car. While a business car purchase agreement might include three years of free service, buying a car means the upkeep and maintenance responsibilities are solely on you. You will have to fund every repair and schedule regular servicing.

Depending on the agreement, leasing a car may include the manufacturer’s car warranty. You are usually covered for routine maintenance and repairs, though anything out of the ordinary won’t be covered and might lead to fines. You might have to pay additional charges if you return a leased vehicle with unexpected wear and tear.

If your business needs a van rather than a car, it might be a good idea to purchase it outright to avoid these fines. Vans are highly prone to wear and tear, especially when transporting goods.

Mileage requirements

Before investing in a car for your business, clearly define your expectations of its use. Determine the trips it would be used for and the miles it’s expected to travel.

A leasing agreement usually includes a limit on how many miles you are allowed to travel in that car. Generally, leased cars are often charged additional charges for kilometers driven over 24,000km per year. Exceeding these kilometers can attract mileage fees, which can quickly add up as an unexpected expense. A leased business car might also have restrictions regarding the areas you can drive it in.

It might be more cost-effective to buy a car if you need it to cover extensive miles since there won’t be any mileage limitations. A purchased car does have annual mileage limits, meaning you can drive it as far as your budget will allow or use it any way you want.

Tax benefits

The IRS allows tax benefits for companies by deducting business car expenses through the standard rate deduction or the actual expense deduction. If you purchase your business car, you can switch between these deduction choices from year to year.

However, if you opt to lease, you have to stick with your original choice. This tax deduction limitation for a leased company car can be a disadvantage if your business miles dramatically differ from year to year.

The IRS allows your business to do the following if you buy a business car:

• Use IRS Section 179 to deduct the purchase price of qualified cars
• Deduct state or local taxes
• Leverage tax breaks for purchased electric or hybrid cars
• Use your business vehicle as a depreciable asset

Timing is everything

As with anything in life, timing is key. If you buy a business car on 31 December of any year, you will receive the same deduction as a purchase on 1 January of the same year.

Conversely, when you lease a car, a contract signed earlier in the year will lead to more months of eligible payments, which would result in a higher deduction for the year. However, a contract signed in December will lead to no deductions as no payments have been made on the lease for the year.

Pros and cons of leasing a business car

There are many reasons why leasing a car while self-employed is a great idea. However, it’s good to consider the pros and cons of this option before leasing a car for your business purposes. Here are the main advantages and disadvantages of leasing a business vehicle.

Pros

• Access to the latest cars: With a lease agreement, you can always get a brand-new vehicle, meaning you can access various models with the latest tech, such as an electric car.
• Warranty cover: Every leased vehicle comes with a complete manufacturer’s warranty and usually covers the whole of your lease term. That means you will have extra peace of mind if anything goes wrong.
• Tax deductible: You can claim the cost of your monthly installments and any packages, including maintenance, as a business expense. This is particularly more appealing to a sole trader than a personal lease.
• No depreciation hassle: Since you aren’t buying the vehicle outright, you won’t have to worry about its depreciation or the resale value.
• Fixed monthly payments: Fixed monthly installments agreed upon at the start of the contract can help you budget effectively and easily manage car expenses.

Cons

• Increased insurance cost: With a lease agreement, you might pay a higher insurance cost than a car sales agreement. This might seem like a minor cost, but small running expenses can add up over time.
• Mileage limitations: Most car lease agreements limit driving mileage to 12,000 to 15,000 per year. You could be charged an extra 18-25% if you drive more than 30,000 miles at the end of a two-year lease.
• You don’t own the car: If your dream is to eventually own a company car, leasing might not be a great choice. With a lease agreement, you pay to use the vehicle for a certain period and must return it at the end of the lease period.

Pros and cons of buying a business car

Buying a car for your business increases your delivery output, minimizes delivery times, and helps take on more clients. However, whether you are operating in shipping or any other industry, you have to weigh a few key aspects before dedicating the funds required to buy a car. Here are a few perks and drawbacks of buying a business vehicle:

Pros

• Tax benefits: If you buy a vehicle under your company’s name, you can deduct certain expenses, such as ownership costs, gas, auto loan interest, maintenance, and depreciation costs.
• Customization: A leased car leaves little or no room for customization. Typically, you can’t brand or modify the car according to your specific business needs. Conversely, when you own a vehicle for your business, you can modify it to your liking.
• Reduced costs: Buying a vehicle could help you minimize operating costs if you regularly use it for business purposes. You won’t have to pay for good delivery, haul equipment, or shuttle your employees. Instead, you can rely on your company vehicle for all these activities.

Cons

• Higher initial costs: Buying a car is usually a huge investment, whether you make a cash purchase or take out a car loan. You might end up disrupting your normal business operations to free up some of your budget if you don’t have spare money.
• High monthly payments: Although you own the car, loan repayments usually cost more than a lease. You might also need to sign up for commercial auto insurance, which might be handled for you if you lease a vehicle.
• Increased maintenance costs: Because you own the car, you have to deal with all the maintenance expenses, such as regular oil changes, major repairs, and car parts replacements. Unlike with a lease, you can’t call any company when you start hearing grinding noises under the hood.

Conclusion

There is no one-size-fits-all answer to whether leasing or purchasing a car when self-employed is better. Whichever route you choose has unique pros and cons, but some can be more applicable to your business.

However, adding a new car to your business is a great decision, whether you lease or buy. Before investing in a car for your business, consider how you will use the vehicle, whether you can afford the upfront and long-term costs, and the potential tax benefits of leasing vs. buying.