In order to be competitive, businesses must spend their capital wisely. Companies need new technology almost daily it seems. The goal of any business is to increase profits while maintaining quality control standards. The company and its employees must have the right tools to maximize profits while still providing quality products, and services to their customers. Vehicles in many cases are essential tools. Companies must consider the importance of their vehicle fleet, and the cost effectiveness of leasing their vehicles versus buying them outright.
Tax Considerations And Depreciation
According to CarsDirect, vehicles will depreciate from 20 to 40 percent in the first year. Leased vehicles of course also depreciate, but the company does not own the vehicle. Because, of the way leasing contracts are structured the depreciation is paid for in the monthly payments. In most cases, the entire monthly lease payment is tax deductible every year, unless the car was used for other than company business part of the time. In that case, the tax burden would be based on percentages, for example, 80 percent business expense and 20 percent other.
For purchased vehicles, only the interest on the loan is tax deductible. The tax code is structured in such a way that mileage deductions for cars leased is based on actual, and not the average mileage as with purchased vehicles. In other words if the company puts above average miles on a vehicle purchased they can only claim mileage up to a point. Leased vehicle mileage is actual mileage regardless of the number of miles. Current tax laws provide the greater tax advantages for leased vehicles. Many states have a sales tax on purchased vehicles. The tax is assessed at the full price paid including trade in value. Leased vehicles are only assessed tax based on the contract length.
Newer Cars More Often
Leased vehicles cost less per month than purchased vehicles. Leasing contracts can be set up so that every two years the vehicle is turned back in to the dealer. The company never owns the vehicle though, and many companies may like the idea of owning. Leased vehicles cannot be modified, for example, windows cannot be tinted, or the vehicle cannot be painted in company colors. Most leasing contracts have an allowable amount of miles that can be used in the two years.
There is a financial penalty for exceeding those miles. The penalty might be, for example, 10 cents for every mile over the allowable amount. The allowable amount is based on averages. Currently the average allowed mileage is around 15,000 miles per year, though you may pay extra for extended miles in your monthly contract.
Companies that find it necessary to have newer vehicles find that leasing their vehicles is cost effective. Image is everything in some businesses and having new vehicles to chauffeur clients is extremely beneficial. Purchasing new vehicles every few years is costly, and the depreciation value must be taken into account.
Take, for example, a company that decides to trade in several of their purchased vehicles for new ones. Keep in mind the vehicles have already on average depreciated up to 40 percent. The trade in value in many cases will be less than what is still owed on the loan. Banks will only loan on the value, and many lenders require a 15 percent buffer. The new loan will have to be structured to assume the difference in value versus debt owed on the trade in vehicle. In automotive sales terms, this is called stacking the note. The negative value of the trade in vehicle will be added to the new vehicle.
Warranties and Maintenance Factors
Leasing ensures a new vehicle every two or three years, depending on the actual lease terms. Factory warranties on vehicles are based on 36,000 miles or three years in most cases. What many don’t realize is that the 36,000 miles is usually reached before the three years. The warranty states 36,000 miles or 36 months. Extended warranties are extremely costly and many opt out of buying the extended warranty. The company in many cases has a vehicle 18 months and the mileage is over 36,000 thus the warranty period is over. Leased vehicles carry the warranty for the duration of the contract term.
Companies for the most part will benefit more from leasing than purchasing their vehicles. There are exceptions of course, such as industries where vehicles are used in the actual work—like construction for instance. There is a financial penalty for excessive wear on leased vehicles. Turning in leased vehicles that are damaged is expensive. Leasing vehicles for company executives makes financial sense. These employees will always have newer vehicles, and the company will not end up with a used vehicle inventory.
Gina Hamilton is a financial consultant and also writes for rate comparison sites. She suggests you compare auto insurance quotes at Kanetix, an online site with information and quotes for all types of insurance in both Canada and the U.S.
CherrellT