Tax Explainer: Leasing vs Buying
Angie M Grainger
When considering whether to lease or buy a vehicle for tax purposes, there are various factors to consider. Here are the pros and cons of each.
Leasing a Vehicle
Deductible Expenses: Lease payments can be tax-deductible if you use the vehicle for business purposes. The IRS allows you to deduct the business use percentage of your lease payments.
Lower Initial Costs: Leasing often requires a smaller down payment and lower monthly payments compared to buying, which can free up cash flow for other business expenses.
Potential Upgrades: Leasing allows you to drive a new vehicle with the latest features every few years without worrying about selling or trading in the car.
No Ownership: Since you don't own the vehicle, you won't build equity in it. At the end of the lease, you return the car without any asset to show for the payments made.
Mileage Restrictions: Leases come with mileage limitations, and exceeding those limits can result in additional fees.
Potential Costs at Lease End: Charges for excess wear and tear on the vehicle can apply at the end of the lease, adding unexpected costs.
Buying a Vehicle
Ownership: When you buy a vehicle, you own it outright or through financing. This means you build equity in the vehicle over time, and it becomes an asset.
Tax Deductions: You can claim depreciation, interest on a loan (if financed), and certain vehicle-related expenses if used for business purposes. Section 179 allows for immediate expensing of a portion of the vehicle's cost in the year of purchase.
No Mileage Restrictions: There are no limitations on the miles you can drive, unlike a lease.
Higher Initial Costs: Buying a vehicle usually requires a larger down payment and higher monthly payments compared to leasing.
Depreciation: Vehicles depreciate over time, and the value might decrease faster than the tax benefits you can claim, impacting your overall financial benefit.
Maintenance and Repair Costs: As the owner, you're responsible for maintenance and repair costs, which can add up over time.
When deciding between leasing and buying for tax purposes, consider your specific business needs, financial situation, and how you plan to use the vehicle.