Oftentimes the most difficult decision to make when getting a new car is whether to buy or lease it. Leases look great on paper with their low monthly payments and few out-of-pocket maintenance costs, but are they the best long-term financial decision?
If you like the idea of getting a brand new car every few years, then leases are very attractive. They offer low monthly payments and virtually no maintenance costs. However, at the end of your lease term, you are forced to make a major financial decision: do you return the car and buy or lease a new one, or do you buy the vehicle at the lease-end price? If you want to avoid the 10-20% down payment on a purchase, drive fewer than 15,000 miles a year, and keep your vehicle in good condition, then leasing might be a good option for you. On the other hand, if you think that you will want to buy the car after your lease is up, purchasing the car from the outset will save you more money in the long term. It may also be the only option if you have a low credit score. Owning the car also gives you the freedom to customize it by adding special features and to drive in excess of 15,000 miles a year if necessary. More importantly, if you plan on keeping the car for at least five years (the typical loan term), the cost differential between buying and leasing is immaterial. See the cost break-down below between buying and leasing a 2016 Honda Civic LX (MSRP $19,440).
|Down Payment #1||$1,999||$3,000 (15%)|
|Down Payment #21||$1,999|
|Total Payments Over 5 Years||$10,140 ($169/month)||$18,180 ($303/month with 2% financing)|
|Estimated Maintenance Costs Over 5 Years2||$0||$4,469|
|Estimated Resale Value3||$0||($8,000)|
As shown above, the difference between buying and leasing this vehicle over five years is only $3,511. After six years, it becomes increasingly more cost effective to buy rather than lease.
What if you’re considering purchasing or leasing a vehicle for your small business? There are additional facts to consider other than the cost differentials shown above. Leasing the vehicle may result in larger annual tax deductions because you can deduct your monthly lease costs (less the modest income add-back). While taking depreciation on a purchased vehicle may seem more attractive, there are dollar limitations on vehicles weighing less than 6,000 pounds. If you’re considering purchasing a larger vehicle (in excess of 6,000 pounds), the depreciation allowances are more generous, allowing a deduction of $25,000 plus regular depreciation in the year of purchase.
There are many things to consider when making the decision to get a new car. Generally, if you plan to keep the car for five years or longer, it may be better to buy it. However, if you’re set on having the latest and greatest every three or four years, then stick with the lease. If you have any questions or concerns regarding this topic or any other tax matters, please do not hesitate to contact your L&B professional at (858) 558-9200.