You’ve sifted through all the options of what year, what make and model, and even what color for your next vehicle. Now you have one more decision: Should you lease or buy?
The answer depends on what your priorities and needs are. Below is a brief breakdown of the pluses and minuses of both options.
- Minimal initial investment with relatively low monthly payments.
- Hassle-free trade-in at end of lease term.
- Convenient option for those who replace their vehicles every two or three years.
- Can deduct lease payments if it is a business vehicle
- Most leases limit the number of miles the lessee may drive. This is usually somewhere between 12,000 and 15,000 per year. Excess mileage can be very costly.
- The lessee does not build any equity in the vehicle.
- Getting into a lease cycle encumbers the lessee to monthly payments forever, whereas when purchasing a vehicle the monthly obligation would terminate once the loan is paid.
- The vehicle must be kept in good condition or the lessee will have to pay excess wear-and-tear charges at the end of the lease term.
- If you need to get out of a lease before it expires, the lessee may have to pay high early termination fees and penalties.
- If it is a business vehicle (if it is used more than 50 percent for business), you cannot deduct or depreciate the full cost of the vehicle; thus, the tax savings due to potential business write-off is limited to the monthly lease payments instead of full cost of the vehicle.
- There are no limitations on the number of miles driven or the wear and tear of the vehicle. Of course, a high-mileage vehicle that is not well-maintained will not be worth as much in trade-in value.
- Once the loan is paid, you own the vehicle and can keep it as long as you want or need.
- There is often equity in the vehicle that can be used to pay for a down payment on your next vehicle.
- If it is a business vehicle (meaning it is used more than 50 percent for business), then the cost of the vehicle can be depreciated. If the vehicle is an SUV or truck that is at least 6,000 pounds (GVWR) then it can be 100 percent written off, resulting in tax savings in the year of purchase.
- Higher monthly payments and up-front costs such as a down payment, taxes, registration and other fees.
The bottom line is leasing a vehicle is best for those who do not plan to keep a vehicle for a long period of time, want to minimize their up-front costs and can stay within the mileage allowance.
Purchasing is preferable for those individuals who see a vehicle as a long-term commitment, want to be debt-free at the end of the loan and do not want to be restricted in the number of miles they can drive. Whichever you choose, please contact us so we can advise you about your business deduction.