Buy or lease: For tax purposes, what's the best way to own a car?

Choosing a new car is easy: working out whether it’s best to buy or lease is the hard part. Here’s a breakdown of the pros and cons to help you determine the right option for you.

Jan 15th, 2016
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Choosing a new car is easy: working out whether it’s best to buy or lease is the hard part. Here’s a breakdown of the pros and cons, including tax consequences, to help you determine the right option for you.

Buying a Car

One of the main benefits of buying a car is that once you’ve paid off the full balance, you’ll own the car and won’t have to hand it back. Your insurance premiums will be cheaper because you won’t need gap insurance and if you use the car for business purposes, you’ll be able to claim tax relief on your interest payments.

If you have enough cash to purchase the car outright, then you can deduct a significant amount from your taxes. The specific amount depends on how much the car costs and how much you use it for your business. Depending on the car, you could lower your tax burden by thousands of dollars.

Of course, there are some disadvantages, too. If you use a loan to buy the car, then you risk of negative equity. When you buy a car with a loan, your repayments reflect the entire purchase price of the car, usually amortized over a six-year period. However, early depreciation can mean that the car ends up being worth less than the loan amount itself—a major problem if you want to change your car soon after buying it. Selling the car may also be difficult, especially if you want a reasonable return on your investment.

Leasing a Car

Leasing provides an alternative when buying a car isn’t an option. It requires little or no down payment, and monthly payments are usually lower compared to loan repayments as you’re only paying for the use of the vehicle.

It’s also tax efficient as lease payments are tax-deductible business expenses. This is a good option if you prefer spreading out the tax benefits over several years. Instead of getting a huge deduction one year, you get smaller deductions throughout the term of your lease.

In spite of the benefits, leasing has a number of disadvantages. Some disadvantages include:

  • Restrictions on how many miles you drive
  • Penalties for ending your lease early
  • Not being able to alter the car’s appearance or mechanics

Whether it’s best to lease or buy a car will depend on your individual circumstances. When it comes to the tax advantages, the biggest choice is whether you will get a large deduction one year or smaller deductions for several years. Regardless, it’s largely a matter of your personal preference and business plan.

As always, give us a call before your next vehicle decision. Owning a car, especially as a small business owner, needs to be proactively managed for the full tax benefits. Traveling to CE’s or any other mileage, fuel, maintenance, insurance, depreciation, etc. can be a lot to remember. With the right dental CPA, you won’t have to!

For more information, contact the CPA advisors at HinrichsZenk+Pesavento LLC. To set up a consultation with an HZP advisor, call HZP's Kansas City office at (913) 681-1350 or Chicago office at (708) 447-8399.

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