Starting a business is one bold step anyone could take. But it comes with its headache — and that is making decisions. Some could be easier, but usually, most aren’t straightforward. An example is deciding whether to buy or lease a car for your business.
The confusion is glaring here. Every business owner wants their business to thrive. You’d need to cut down costs as much as possible while getting tax deductions that would benefit the business. So, which serves your business best when you need a car for your business? Do you buy it? Or go for a lease?
The best part to start answering this question is letting you know there are tax deductions for you on every business use of your company car. But of course, the authorities wouldn’t want this abused. So, it comes with specific tax rules — one of which is whether you are buying or leasing a car for business.
However, before we go on, let’s consider the basic difference between buying or leasing a car for your business.
Initially, you’d agree leasing requires less cost than buying the car. For a car you’d need to purchase at $30,000, you might only spend half of that on a lease in 3 years.
Now, that is a good deal. But only if you plan actually to buy a car in 3 years. Why? Because after then, you might be spending more financing your lease, and before long, the total cost overrides the amount you’d have spent on buying one.
Leasing has a good advantage when considering getting a “luxury” vehicle, as the CRA defines. The tax rules generally limit how much you pay leasing such cars, which might mean you spend less over a long time than buying and maintaining the car.
The more important standpoint considers how much tax you pay when leasing or buying a car for your business.
The maximum tax deduction for leasing your business car is $800 monthly. Hence, you can deduct your business percentage use of the car from your lease payments to a maximum of $800 monthly.
To clarify this, consider a scenario where you use the car for business about 80% of the time you drive the car in a month. If you’re expected to pay $350 per month on the lease, you can deduct $280 per month from your tax deductibles. That’s a whooping sum of $3,360 annually on tax deductions when on lease.
In contrast, if you were to buy, the maximum tax deductions allowed for the average car is $30,000.
You should note that you can not deduct this all at once. You’d have to depreciate it over the years at 30% of the undepreciated amount until you have deducted all. Also, note that the first year of purchase only allows a depreciated deduction of 15% of the maximum deduction allowed.
That would mean a $4,500 deduction in the first year, leaving behind an undepreciated amount of $25,500. Thus, in the second year, deductions allowed would be a sum of $7,650. You also get to make a deduction on loan interest incurred in purchasing the car based on your business use.
In all, there’s no clear-cut answer to whether to buy or lease. Generally, in the long run, buying could be cost-effective. However, leasing offers you more tax deductibles. So it depends on how often you’d love a change, among other options.
However, the most important factor when considering tax deductibles is your business use of the car. Note that driving to your place of work from home or back is not part of the business use of the car. Such expenses are not billed to the company’s account and, as such, are not eligible for tax deductions.
Hence, if you’d be using the car for both personal and business use, you should watch out to reduce your personal use to the bare minimum possible. The best trick is to ensure your personal use never exceeds 50% of the total mileage traveled.