Small business owners often rely on Company vehicles to run their operations. Whether you use a car to visit clients, a van to make deliveries, or a truck out on a job site, a common question comes up – should I buy or lease?
To answer that question, let’s start with why you might choose to lease or buy.
Leasing a car – Under this arrangement, you enter into a lease agreement and pay a monthly amount. You may be required to put a small amount down toward the lease. The agreement typically covers a period of two to three years. At the end of the lease, the vehicle is turned back in. In some cases, you may have the option to purchase the vehicle at its current fair market value at the end of the lease.
Monthly lease payments are typically less than what they would be if you purchased and financed the car. However, lease agreements usually have a limit for the total miles that can be driven. This mileage limit is typically 10,000 – 12,000 miles per year. If you exceed this limit, you will be charged an extra fee for every mile above the allowed amount.
What You Can Deduct – The Canadian Revenue Agency (CRA) allows you to deduct up to $800 plus HST of your lease payments each month. This is limited to the percentage that the vehicle is used for business purposes. The CRA considers any vehicle that is $30,000 or more as a luxury vehicle, which may slightly reduce the amount of lease payments that you can deduct for business use.
Who Benefits Most – For some, leasing a car makes sense. To make that determination, you should consider;
• What type of car you need – If you are looking for a more expensive car, monthly lease payments are typically less than loan payments. If you are limited in funds each month, leasing a car can allow you to purchase a more expensive vehicle. In addition, leased cars typically require less money down than a purchased vehicle which is financed.
• Leasing lets you get a new car every few years.
• If you don’t expect to exceed the mileage allowance, leasing may be a good option for your business.
Buying a car – Most small business owners finance the cars that they purchase, as opposed to buying them outright. Loan payments are made up of both principal and interest. As you make your monthly payment, the principal portion will reduce your total loan balance. Once paid off, you own the car free and clear.
What You Can Deduct – There are two ways to take a deduction for a vehicle that you own. If you have financed the vehicle, the interest portion of your payments is deductible up to $300 per month. In addition, the CRA allows you to take a Capital Cost Allowance (CCA) deduction each year. This is commonly known as depreciation. For the first year that you put the car into use, you can deduct 15% of the cost. In the second and all remaining years, you can deduct 30% of the declining balance of the cost.
To illustrate – Company A purchases a new vehicle for $15,000.
• Year 1, the CCA is $2,250 — calculated as $15,000 x 15%.
• Year 2, the CCA is $3,825 — calculated as $15,000 – $2,250 = $12,750 x 30%
• Year 3, the CCA is $2,678 — calculated as $12,750 – $3,825 = $ 8,925 x 30%
This calculation will continue until the vehicle has been depreciated in full.
With the CRA luxury automobile limitation of $30,000 (before HST), the total CCA is limited to that amount. If you purchase a car for $40,000, you will be limited to $30,000 worth of depreciation over the life of the car. If you have financed the car, however, you can deduct monthly interest paid up to $300. This means that you may be able to deduct interest on the full $40,000 cost of the car, as long as it doesn’t exceed $300 each month.
Both interest and depreciation are deducted based upon the business use percentage.
Who Benefits Most – Purchasing a vehicle is a good option in many situations including;
• You intend to keep the car for several years
• You drive extensively and expect to exceed the mileage limitation that a leased car would have
• Tax deductions can be higher, however, they take longer to realize than leasing
Buying versus Leasing – What Else Should I Consider?
When deciding whether or not to buy or lease a company vehicle, there are a few other matters to consider.
Timing of Transaction – Whether you purchase a car on January 1 or December 1, you are entitled to the 15% CCA. If you lease the car, however, you can only deduct the actual lease payments that you make. If you leased the car on January 1, you would be able to deduct 12 months of lease payments, but if you leased the car on December 1, you would only be entitled to deduct 1 month of lease payments.
Gains and Losses – If you sell or trade-in a purchased vehicle, you could realize a taxable gain or loss if you receive more or less than the car’s book value. Book value is determined by taking the original cost and subtracting the total CCA to date for that vehicle.
Leased vehicles, on the other hand, have no gain or loss when you turn them in as you do not own the vehicle.
Other Vehicle Expenses – Certain automobile expenses are deductible, whether you lease or buy. Repairs and maintenance, gasoline, and fees are deductible in either situation. The amount of the tax deduction is based upon the percentage of business use of the vehicle.
When making the ‘buy versus lease” decision, you should consider what the intended purpose of the vehicle is and how frequently it will be used. In addition, the company’s financial ability to make a downpayment, as well as monthly payments should be determined. Finally, analyze your tax benefit to help you select which option is best for your company. As you can see, there is no definitive answer to the buy versus lease question. Ultimately, the decision is based entirely on your situation.
