In order to successfully run their businesses, many companies require some kind of transportation. For example, landscapers and building contractors typically require multiple trucks and cars to complete their work. When it comes to getting a vehicle for your company, you have two choices: you can either buy one or lease one, and both have their advantages and disadvantages.
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Leasing can be a relatively complicated transaction, in contrast to purchasing, which is typically a straightforward process. As a result, it is essential to have an understanding of some key distinctions between the two, as well as the process of vehicle leasing and the steps involved in doing so.
Should You Lease or Buy?
When you buy a car, you have to make a sizable down payment, and after that, you own an asset that is tax deductible. When you lease a car, on the other hand, instead of making a down payment, you pay a monthly fee and are not considered an owner of the vehicle. Which of these two choices do you think would be best for your company? Let's discuss the repercussions, benefits, and drawbacks of each option.
How a Business Car Lease Works
A car rental over a longer period of time is essentially what a lease is. The cost of leasing a vehicle, on the other hand, can be significantly lower than the cost of renting a vehicle due to the lengthier lease terms, which are typically around three years. When you lease a car, you are required to sign an agreement that is relatively difficult to understand and contains some fine print.
It is essential to be aware that various companies have varying policies and options for leasing, and because of this, it is in your best interest to conduct thorough research on the topic. It is essential that you are aware that certain aspects of a lease, such as the mileage allowance and the money factor, are open to negotiation (aka interest rates, depending on your credit score).
Before moving forward, you should give some careful thought to a few significant factors that could influence whether you choose to buy or lease the property. These provisions are referred to as the "fine print" in the paperwork, and they may have a significant impact on both your costs and your flexibility.
When a car is driven off the lot, regardless of whether it was leased or purchased, its value immediately drops. Once it is damaged in any way, the value will decrease even further. After the car has been driven for the standard amount of time, which is three years, the leasing dealership will, of course, want to recoup as much of the value of the vehicle as possible. In order to make this work, you and the dealership will need to adhere to something that is known as "residual value." This refers to the value of the vehicle at the conclusion of the lease term, taking into account the normal amount of wear and tear.
You have a chance of coming out ahead financially if the value of the car that you turn in is higher than the value of the car's residual. You are responsible for paying the difference in price if the item ends up being worth less due to unforeseen damage. In light of this fact, it is essential to search for leased vehicles that are likely to retain at least fifty percent of their value after three years have passed. In the event that you cause damage to the vehicle, it is imperative that you have the damage repaired before the end of the lease. Ideally, the money for the repairs should come from the insurance policy.
Open Versus Closed Leases
You might be able to negotiate the terms of your lease so that you have the choice between an open-end and a closed-end lease. The difference between an open-end lease and a closed-end lease is that the former requires you to take financial responsibility for the car's condition at the end of the lease, while the latter requires you to take responsibility for the car's residual value at the end of the lease (i.e., any excessive wear and tear). 5
You are responsible for paying for any damage to the vehicle caused by normal wear and tear if you have an open-end lease, but you also have the potential to receive a refund if the car you return is worth more on the market than the guaranteed residual value.
The lessee is not obligated to purchase the leased vehicle at the conclusion of the lease term in the case of a closed-end lease. Although the terms of this type of lease may be more stringent, the lessee is not responsible for the cost of depreciation; rather, the responsibility for this expense lies with the lessor.
Estimated Number of Miles
According to Kelley Blue Book, mileage agreements can range anywhere from 10,000 miles per year to as many as 15,000 miles per year depending on the lease. After reaching that mileage threshold, you will be subject to a per-mile charge that can range anywhere from 12 to 30 cents per mile. 2 When driving a vehicle for work on a regular basis, the number of miles driven can add up quickly. It is imperative that you calculate an estimate of the number of miles you will drive each month and evaluate this estimate in light of any proposed lease. If you regularly cover a distance that is significantly greater than the one specified, you have the option of negotiating the mileage or considering buying a car rather than leasing one.
Rental Duration and Payment
The average length of a car lease is 36 months, and the average monthly payment is $460. Your payment and lease terms can vary based on a variety of variables, such as:
- Car make and model
- Duration of lease
- Active or inactive lease
- Mileage limits
- Drive-away charge
- Availability of discounts and specials
Typically, you will work with a dealership to negotiate all lease terms so that you receive the best possible deal for your specific needs. If negotiation still leaves you paying more for the lease (including fees, mileage, and monthly payments) than you would for an acceptable vehicle purchase, you may decide that purchasing the vehicle is the better deal.
Tax Implications
When leasing a vehicle for your company, there are a few tax considerations you should keep in mind. Leasing allows you to use money that has already been set aside for taxes. Suppose you need to buy a car and some equipment totaling $50,000. How much do you have available? Your company will have to pay a total of $50,000 for that purchase; however, the rent payments can be deducted as an operating expense.
Business Vehicle Leasing Instructions
The process of leasing a car for your company can be broken down into the following steps.
- Make a list of the features you want and the necessities you require in a leased vehicle. Include the price range and the amount of mileage you require.
- You should do some research to find reputable dealerships that lease cars, and you should look for deals on those dealerships' websites.
- When you have a couple of solid options to choose from, it is time to inquire about a standard lease agreement and give it a thorough reading. Inquire about warranties, drive-off fees, and maximum mileage limits before making a purchase.
- Collaborate with your dealer to reach the most favorable agreement possible.
- The paperwork needs to be signed, and the driveaway price needs to be paid. However, you should make sure that you are completely covered by insurance before getting behind the wheel. You should also consider purchasing gap insurance, which pays the difference between the amount a vehicle is currently worth (which is covered by your standard insurance) and the amount that is still owed on it. Standard insurance will cover the difference.
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