There are times when buying or leasing a vehicle through your small business is a must. After all, it’s pretty hard to make your flower shop deliveries or show your real estate clients homes without a set of wheels. The same holds true if you own a service-based company—such as one that specializes in plumbing, landscaping, or house cleaning—where clients rely on you and/or your employees to be able to make house calls.
But what do you do if you’re considering purchasing or leasing a vehicle through your small business specifically for your own use? How do you know whether it’s the right move for you, and whether it offers enough benefits to make it worth it? To help you answer questions like these, we’ve reached out to Steven Levin, President of Spending Plan Advisors LLC.
While he provided a list of factors to consider before making the final decision, most fall into four basic categories: 1) your company’s financial status, 2) how you intend to purchase the vehicle, 3) what type of vehicle you want, and 4) whether it makes sense tax-wise.
Factor #1: Your Company’s Financial Status
“My experience is that many of the considerations a small business owner would need to address are not that dissimilar to those of an individual,” says Levin, an expert with 25-plus years of experience in the fields of financial services and debt relief. One is your company’s current financial status or, put simply, whether or not you can afford it.
For instance, if your business is in the red and you’re having a hard time keeping your doors open, buying or leasing a vehicle through your business probably isn’t the best idea. Not only could a purchase of this type keep your liabilities above your assets, but it could also erode your relationship with your staff. This is especially true if they’re struggling to do their jobs because of being forced to use second-rate equipment or if they haven’t received a raise in years, yet they see that you’re driving around in a brand new company-owned car.
Determining your company’s financial status involves thinking about a variety of things, says Levin. Some of these include:
- How long you’ve been in business (whether it’s a new business or well-established)
- How profitable your business is
- What your cash flow is
By comparison, a company that has been in business for 50 years that has been profitable every year for the past few decades, thus maintaining a positive cash flow, would be in a better position to withstand a vehicle purchase than a company that was just created a year ago and is barely able to afford utilities, payroll, and supplies.
Don’t forget to include insurance costs in your business’ future financial projection, as this reoccurring expense can really add up over time. This also means realizing what type of insurance you will need, and that depends on how you intend to use your vehicle says Intuit QuickBooks.
For instance, if you plan to use your business-purchased automobile mainly for business purposes, then you may need commercial auto insurance. However, if you’re using it for personal activities and errands as well, then your regular auto insurance policy may be good enough. (You’ll want to check with your insurance agent to know for sure.)
Factor #2: How You Intend to Purchase the Vehicle
When considering whether obtaining a vehicle through your small business is the right decision for you financially, you also need to think about how you intend to pay for it. Sure, if your business is doing well, it may be possible for you to buy your vehicle outright, paying cash and driving it off the showroom floor. But, if not, then it’s important to know your financing options.
“Financing is a big consideration, particularly since new car rates have been low for a long time,” says Levin. He also adds that this option is sometime preferred, as it’s not too hard to find “special dealer rates and incentives for new cars versus leased cars.”
While most auto dealerships advertise their current deals and incentives using local media, another option is to use websites designed for this purpose. For instance, Edmunds lets you easily find incentives and rebates by browsing by vehicle make or type, or by searching local dealers to see which ones offer the best deals.
Consumer Reports also provides a list of the best new car deals, giving you the information you need to make an informed decision. This includes telling you what the MSRP (manufacturer’s suggested retail price) is for that vehicle, the invoice price, potential savings below MSRP, and even the incentive expiration date.
However, Levin also says that there are some circumstances in which leasing is a better option. “A vehicle that is not garage kept, cleaned, or well-maintained may be a better lease option,” says Levin. “This also applies to owners who want a new car every few years and can stay within the mileage limits and other lease terms.”
Leasing may also make more sense if your company hasn’t been open that long, as “newer businesses that don’t need deductions may want to lease in order to keep payments low and to help keep cash flow and working capital positive,” says Levin. This is opposite to a more established business with positive cash flow that may be looking for some of the available business deductions that come with actually owning a vehicle.
What do you do if you can’t decide between buying and leasing? “In the end, if the decision is not automatically apparent, then a business owner should construct an ‘Own vs. Lease’ table considering all of the factors involved in the decision,” suggests Levin. “The weight of those factors will be important based on certain preferences,” says Levin, but utilizing this type of comparative approach can help you arrive at the best decision possible for your small business, making it a decision that is more than worth the time and effort you put into researching it.
Factor #3: What Type of Vehicle You Want
When deciding whether you should use a vehicle as a business expense, you must also consider the vehicle you want. Specifically, Levin says you should think about the type of vehicle you intend to purchase, such as whether it’s high-end, middle of the road, or some kind of specialty vehicle. Each one comes with a different price tag and can meet different needs.
For example, if you plan to utilize your vehicle for personal use too, then you want one big enough to hold your entire family. And if you live in an area that is subject to a lot of snow, then a four-wheel-drive or all-wheel-drive vehicle may make the most sense so you’re able to better navigate what is often treacherous winter roads. A long commute makes a vehicle that is either long-range electric or good on gas a must.
Another vehicle consideration is the estimated resale or residual value of vehicle, says Levin. Considering this type of information up front, before you make the purchase, can potentially save you a lot of regret. It can also help you make the best decision possible when it comes to which vehicle you’ll eventually purchase in your business’ name.
Just remember that, ideally, you want to select the one that will work best with what you intend to use it for and the number of miles you expect to drive daily, yet will also provide the best resale value down the road, when you’re ready to sell it or trade it in.
Factor #4: Whether It Makes Sense Tax-Wise
A fourth factor to consider before busying a vehicle through your small business is whether this type of purchase makes good tax sense, says Levin. This means, in part, knowing what your tax rate is as well as whether you’d benefit from a transportation-type of deduction on your tax forms.
Admittedly business-related tax laws can be extremely complex, which makes knowing which ones apply to you, as well as how to apply them, an overwhelming task. Case in point: the transportation section of the Internal Revenue Service’s Publication 463 (formally called “Travel, Entertainment, Gift, and Car Expenses”) is 10 pages long and explains in many, many words all you need to know about vehicle-tax deductions.
For example, if you read it you will learn when some expenses are deductible, how to determine if the standard mileage rate applies, and what effect vehicle depreciation has on your yearly tax status. If you can understand everything this publication says and accurately apply it to your own business, then you’re one step ahead (if not more) of most of the rest of us.
However, tax laws change from year to year. That’s why working with someone who is intimately familiar with your business and “can address what can be deducted and what can’t,” is critical says Levin. Best case scenario, it can potentially save you a lot of money but, at a minimum, it will at least help you make the most of your auto-related expenses. It may even keep you from being audited, which means a lot of saved hassle there too.
At this point, if you’re ready to reach out to your accountant to get advice directed toward your situation and your small business, then some questions you may want to ask include:
- Does the vehicle need to be in the business’s name in order to write it off?
- What other vehicle-related expenses need to be accounted for so they can be deducted too? (Think gas, oil changes and other maintenance tasks, and possibly even car washes.)
- Is a vehicle purchase a one-time tax deduction or does it require depreciation over several years?
- Is the interest paid on an auto loan tax deductible?
- Do I need to keep different mileage records for personal and business use?
- What type of vehicles do you recommend I consider?
- What type of vehicles do you recommend I avoid?
- Anything else I need to consider before making my decision?
Buying or leasing a vehicle through your business isn’t always an easy decision. However, as long as you keep these four factors in mind, it’s more likely you will make the right one for your small business.