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Many businesses require a vehicle to carry out day-to-day operations. But when it comes time to acquire one, should you buy it, or lease it through your business?
Leasing a car through your business might mean lower upfront costs and the ability to upgrade frequently without a hitch. But you’ll also be restricted to the number of kilometres you can put on it as well as any potential modifications you might need to make.
Let’s take a closer look at leasing a vehicle through your business to help you decide if this makes the most economical sense for you.
Odds are, you need a vehicle for your business. While you could always pay cash for the car and buy it outright, you may want to lease it instead, which you can do through your business instead of as an individual.
Leasing a car through your business simply means that your business is on the title of the vehicle instead of you.
There are two types of leasing options available to business owners: open-ended and closed-ended leases. Each offers a purchase option that would let you buy the vehicle when the lease term ends. Otherwise, you can return the vehicle and upgrade to another model.
An open-ended lease is typically short-term and doesn’t have mileage restrictions. You’re responsible for your vehicle’s depreciation and how much it’s worth by the end of the lease, which is referred to as the vehicle’s “residual value”. Since your business is responsible for the vehicle’s depreciation rate, you’re free to use it any way you see fit with no restrictions.
If you intend to use your business vehicle on a regular basis, an open-ended lease might be ideal since it gives you more flexibility for depreciation and wear and tear.
Unlike open-ended leases, a closed-ended lease comes with specific business car lease requirements, including mileage restrictions, fixed monthly payments, and fixed terms. Close-ended leases are based on mileage, which means you won’t be responsible for the vehicle’s cost of depreciation or its residual value. However, there is a limit on mileage, which means you’ll be paying extra if you go over that limit.
If you plan to use your business vehicle semi-regularly, then a closed-ended car lease might be best.
The amount you’ll pay on a lease for a business vehicle will depend on your lease agreement. On an open-ended lease, you’ll pay a monthly fee, plus the difference between the vehicle’s original anticipated residual value and the actual resale value when the lease ends. On a closed-ended lease, on the other hand, you will just pay a monthly payment and any applicable mileage costs.
There may be other costs associated with leasing your vehicle through your business, such as the following:
There are unique benefits of leasing your car through your business, including the following:
Along with the perks of leasing your car through your business comes a few drawbacks to consider as well, including the following:
To lease a car through your business, follow these steps:
Will you be using the vehicle predominantly for business purposes? If so, leasing it through your company makes sense. You’ll be able to write off expenses related to your car to save on taxes.
But if you only plan to use it sporadically for your business and drive it more for personal reasons, it might make more sense to lease or finance it in your name.
Also, consider how long you intend to keep the car for. If you like the idea of a new car every three years or so, then leasing might be a great idea. But if you prefer to hang onto the vehicle for the long haul, then purchasing it might make more economical sense.
Find out if you should buy a new or used car.
There are certain costs associated with leasing a vehicle that you should get familiar with before going this route, such as the following:
Shop around with different lease companies, banks, and car manufacturers and compare their offers to find the best deal.
Once you’ve settled on a lease company and contract, be sure to carefully go over all the terms of the lease before you sign off on the contract. For instance, you’ll want to determine the exact MSRP and negotiate the cap cost to the lowest price possible.
In order to qualify for a car lease through your company, you’ll need to meet certain criteria, which will vary from one lease company to another. Generally speaking, however, you’ll need the following:
If you lease your car for business purposes, you can write off a portion of your lease payments. More specifically, you can deduct the business portion of your lease payments come tax time. There is an $800 limit (plus HST) on monthly lease payments that you can deduct, which adds up to a $9,600 maximum in tax-deductible expenses per year.
Let’s say your annual lease payment is $4,800 (or $400 per month) and the percentage of your lease payments for business use is 75%. In this case, you could deduct $3,600 on your tax return.
Keep in mind that the CRA tax rule has limits on the depreciation on vehicles that are considered luxury cars, which means there would be limits on lease payments for these types of vehicles.
Check out the tax rebates for electric and hybrid cars.
Whether you should lease or buy your car through your business depends on a few factors. Refer to the chart below to help you decide which road to take.
|Buying a Vehicle||Leasing a Vehicle|
|Owner of the vehicle||You or your business. The lender only has a lien against it if you default on your payments.||The dealership.|
|Upfront costs||-Down payment between 10% – 20% of the vehicle’s value|
-Provincial registration costsTaxes
-First month’s payment
-Taxes and fees
|Size of payments||Payments include principal and interest. Shorter loan terms mean higher payments; longer terms mean lower payments but higher interest overall||Smaller payments (unless the leased vehicle is more expensive). Any interest or fees charged by the lender for mileage and depreciation could bring yearly limits up.|
|Vehicle maintenance||Required to keep the vehicle in good condition.||Required by the lease company to take care of excessive wear and tear.|
|Early end to contract possible||Yes, but lenders may charge early prepayment penalties.||Yes, but higher fees and charges may apply to end a lease contract early.|
|End of loan term requirements||You’ll own the vehicle free and clear of any liens and can either keep or sell it.|
Open-ended lease: you must buy the car.
|Closed-ended lease: you can either end the term or buy/lease another vehicle.|
Having a business vehicle as part of your company fleet may be necessary to help you carry out business operations. But you’ll need to decide whether or not it makes sense to lease the car through your business or buy it outright. Consider things such as how much mileage you intend to put on the car, how often you think you may need to upgrade, and the potential tax deductions that may be available to you before making your decision.
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