By Karen Timmermans, CPA
Gray, Gray & Gray, LLP
“Should I buy my new car, or lease it?”
Of the thousands of inquiries we get every year about corporate and personal finances, this question is among the most common, and is usually delivered with great passion and concern. The personal nature of choosing a new vehicle, and America’s long love affair with the automobile, give the decision to “lease or buy” an importance that goes beyond the potential financial consequences.
Let’s address, once and for all, the relative merits of leasing vs. buying. This discussion is focused on “company cars” more than vehicles for private, personal use.
To begin with, it is almost always a good idea to obtain and register the car in the company name. This will allow you to deduct all costs and expenses. Yes, you’ll need to purchase a commercial automobile insurance policy, but that cost can also be deducted as an expense. The tax deductions generally work out in your favor.
If you do use the vehicle part-time for commuting or other personal trips, you’ll need to report a portion of the vehicle value as personal income, usually as an item on your W-2. You will need to track the details of your business use in a contemporaneous mileage log, listing total mileage, where you went and the business purpose of each trip.
Now, should the company purchase the vehicle outright? Or lease it? Much depends on the answer to one question: Do you like to drive a new car every three or four years, knowing that you will have a monthly car payment every month? Or are you OK driving an older, higher mileage vehicle for five years or more, in exchange for eventually retiring the automobile loan and driving debt free?
In many cases it is more beneficial to lease a vehicle, rather than purchase it. Here’s why.
If you choose to purchase a new car or truck you will probably need to make a down payment of 10% to 20% of the vehicle cost. That can be a significant outlay of cash, given that the average price of a new car in the U.S. is over $30,000. In addition, you are financing a larger portion of the vehicle cost, pushing monthly payments higher than monthly lease costs.
Purchase proponents point out that, once the car loan is paid off, you have a vehicle that is free from debt, and also retains some value. True, but the vehicle is now several years old, probably in need of repairs and maintenance, and has depreciated steeply from its purchase price.
Leasing, on the other hand, has a lower cost of entry because you are only “buying” use of the vehicle for a specific period of time. There is no down payment required, although there are lease fees, such as sales tax, and the first month’s lease payment.
Some dealers will try to get you to pay a “capital cost reduction fee,” dangling the prospect of lower monthly lease payments. This fee is not required, and represents “lost” money that can negate any savings the lease offers. If you need to reduce the monthly lease payments you are probably leasing “too much car.” Choose a less expensive model, or one with fewer options, in order to bring costs within budget.
Few people realize that there is an interest rate associated with lease payments. You should ask the dealer what interest rate they using to calculate the lease payment. You can negotiate a lease payment and interest rate, often with more flexibility than a straight purchase.
Another advantage of leasing? Many new leasing programs include free maintenance for the first year, and some even cover all maintenance costs for the term of the lease. The dealer knows the vehicle is coming back for resale and wants to ensure it is well cared for in the interim.
One caution about leasing: watch the mileage. It is important that you estimate the number of miles you will be driving annually and negotiate the lease to reflect these numbers. If you are on the road often and make long trips, it is worth it to pay a little more for a higher mileage allowance. You don’t want to be caught going over your mileage and find yourself getting a bill for thousands of dollars in extra mile fees.
On the other hand, if you are a high mileage driver, perhaps going over 20,000 miles per year, the right lease can help you avoid getting stuck with an old, tired, and overworked car or truck. Simply turn in the vehicle at the end of the lease term and start over again with a shiny new set of wheels!
Whichever acquisition method you choose, have your accountant weigh in on the potential tax consequences of the decision. And happy motoring!
Karen Timmermans, CPA, is a partner with Gray, Gray & Gray, LLP Certified Public Accountants in Westwood, MA. (www.gggcpas.com)