For many businesses that require a business vehicle, business car leasing makes more sense than a cash purchase of a car.
Best Use of Income
Many businesses operate based on their available cash from income and cash reserves. Most of the time, if a business wants to purchase a car they must be prepared to purchase the car outright when they buy it. Most dealerships do not offer financing to businesses, nor do banks or credit unions when it comes to car purchases. For companies that do not have vast cash reserves, it makes more sense to lease a car to preserve cash flow and keep money in reserve should they need it for other pressing expenses.
The primary benefit to leasing a car for business has to do with depreciation. In order to understand how this applies, it is important to backtrack and explain how auto depreciation works.
In the first few years of a car's life, it can depreciate an average of between 20% and 40%. In some cars the depreciation rate can be an alarming 50% in the first five years. As a result of this substantial loss of value, when a car is purchased, the car automatically depreciates the moment it is driven off the lot and that amount will likely never be recouped, even if the car is sold the next day.
When leasing, the customer is basically renting the car for the term of the lease. During this time, the person (or company) leasing the car is paying for the depreciation of the car. This is why the monthly lease payment is so low when compared to purchasing the exact same car. When purchasing the car, you are paying for the value of the car before you leave the lot-in other words, you are paying the pre-depreciation amount no matter what, even if you are buying the previous year's model of car.
Understanding depreciation is extremely important in understanding the tax benefits when it comes to leasing a car, since the tax benefit is about deducting depreciation amounts. When you purchase a car, your payments will be higher than the depreciation amount-remember, this is why leases are less expensive. In most cases, the limits on depreciation for business cars will almost always be higher than the total of lease payments over the course of the lease term. This means that if you lease a business car, you will come out ahead rather than if you purchase that same car for cash.
It is important to point out that allowable depreciation amounts on taxes change almost every year, so before running out and leasing a car for your business, it would be smart to consult your business tax advisor or tax attorney first.
The strongest advantage of leasing a car for business purposes has to do with depreciation limits for cars. In most cases, a car lease will result in a better financial benefit in terms of a lower monthly payment and tax benefits than the purchase of a car.