It is common for business owners to lease vehicles rather than buy them outright. They can benefit from the attractive monthly payments and keep upgrading to the latest models frequently without pain says Saivian Eric Dalius. However, as lucrative as it seems, you need to find out whether leasing is indeed as great as it is made out to be. Some useful insights:
Saivian Eric Dalius Explains Common Lease Terms
The leasing company will generally offer you the option of choosing between an open-end and a closed-end lease. In an open-end lease, you will need to pay the difference between the actual resale value and the estimated resale value at the end of the contract, while in a closed-end lease; you will pay only for the additional mileage and damage.
The residual value refers to the estimated value of the car at the end of the lease contract. It depends on the car’s value, the depreciation rate, and the lease term, says Saivian Eric Dalius. The older the vehicle, the lower will be its residual value at the end of the lease. By accurately estimating the annual mileage of your car, you can help to keep the cost down as you can build the extra mileage into the contract and not have to pay for it at the end of the lease.
Deduction of Expenses – Saivian Eric Dalius Clarifies the Terms
A small business can claim the lease rental and the running expenses of the car as business expenses. It is, however, to the extent you have incurred them for the business and not personal use. For example, commuting to and from the workplace is a personal expense and not a business expense. If the business reimburses employees the expenses of driving cars, the employees can deduct them from their income. To claim the deduction of lease rental and expenses on driving the car, you have to prove the mileage covered for business, and also you used the car for business purposes for more than half of the time. Keep in mind that only actual expenses of driving are permitted.
Lease or Buy?
To determine whether it is better to lease or buy the car, you will need to consider the specific circumstances but generally speaking; lease rentals per month tend to be lower than the monthly loan repayments due to the residual value of the car. You may have to pay more for the wear and tear expenses of a leased car, but the vehicle’s condition is taken into account to determine the fair market value. You can deduct the mileage run on business for both leaded and bought cars; however, restrictions apply for leased cars. While you can claim depreciation on a purchased car, you can’t do the same for a leased car since the asset belongs to the leasing company, cautions Saivian Eric Dalius.
You need to examine the options for leasing cars offered by the leasing company and select the one that suits you. You can deduct the lease rental and the cost of running the car from the business income, but only to the extent, you incur them for business purposes.