What are the benefits of leasing a used car or similar asset for your business?
Purchasing business vehicles or equipment requires a significant investment of cash. You either pay the purchase price in full, or make a down payment and finance the rest. Leasing, however, may allow you to avoid large upfront costs. Leasing business cars and equipment may offer tax advantages and other benefits.
Some benefits to leasing include:
- Fixed lease payments for easy budgeting.
- Claiming monthly payments as a business expense.
- Less concern over wear and tear.
- Less concern about the impact to your credit score compared to a financed purchase.
- Help conserve business cash flow.
- The opportunity to turn the car or equipment in for a new one when the lease term ends.
A vehicle or Equipment Lease is a contract with a fixed term. During that term, nothing about it can change unless both you and the owner agree in writing. You can easily include this expense in your budget. Additionally, the monthly payment you make for a company car or business equipment is a business expense for federal income tax purposes. This means that those payments may be tax deductions.
Your credit score is likely to be a factor in your lease application, especially if your business is relatively new. Leasing, unlike financing a car, however, does not involve financing a purchase or taking out a line of credit, which can negatively impact a credit score.
Lastly, when you own a car, or other asset, you typically sell it or trade it in when you want a new one. At the end of a lease, you simply return the vehicle to the owner.
Which terms require a closer look in my car lease agreement?
You should review leases, and all agreements, carefully before signing. There may be hidden costs, or other issues that may impact your decision. Some of the more important terms to look at include:
Penalties: Leases typically have a specific term, such as one year. At the end of the term, you can either return the vehicle or renew the lease. Many leases include a penalty for ending the lease early. The "early termination fee" could be a flat amount or a percentage of the amount that you would still pay for the rest of the lease term.
Mileage: Some Vehicle Lease Agreements set upper limits on how much you may drive. A lease might set a limit of 12,000 miles per year, with an additional charge if you go over that amount.
Option to purchase: You might fall in love with a leased business car or decide that it would be worth buying equipment for your business. Some leases give you the option to purchase the leased property when the lease ends, possibly at a discounted price.
Excessive wear: What is considered normal wear and tear may vary. The agreement may state what would be considered normal and what would exceed that level.
Damage: The lease may be specific about who is responsible for repairing damage to the vehicle or equipment. Often leases contain insurance requirements to cover damages, or require certified mechanics to perform maintenance and repairs.
What are the benefits of buying a used car for your small business?
You might find that buying a used vehicle or piece of equipment with an Asset Purchase Agreement or a Bill of Sale may be better for your business. After all, buying used may have advantages over leasing. Some of those advantages include:
The asset is yours.
You do not have to answer to a lessor when you own the vehicle. If the car gets damaged, you still might have to answer to your business partners, if any, or your lender if you financed the purchase.
Federal tax law allows you to gradually write off the cost of large assets in a process known as depreciation. Every year, you may claim a portion of the amount you paid for the vehicle as a deduction. The IRS also allows you to deduct nearly any expense associated with a company car, as long as you use it solely for business purposes. Deductible car expenses may include loan payments.
You keep the car as long as you want.
You are not subject to any lease terms when you own the vehicle. You have no set deadline for when you must return or exchange it. Also, there are no mileage or usage limits.
Lower monthly payments.
With a Vehicle Lease, the monthly payments are mainly based on market rates. You may have more control over your monthly expenses with a car loan. The more you can pay upfront as a down payment, the lower your monthly payments can be.
What issues might I consider before making or signing a used car purchase agreement?
You should always be careful when signing a contract. It could contain terms that are not in your favor, but that the seller or lender could enforce against you.
- Be sure that you understand how much you will have to pay in interest on a loan. Watch for provisions that allow the lender to raise the rate.
- Watch out for provisions that impose a penalty for paying off a loan early.
- See if the seller will offer you a deal if you trade in an old vehicle.
- Read any loan contract carefully to look for any extra fees or other unusual terms.
In addition to carefully reviewing the agreement, make sure you have the vehicle or equipment inspected by a professional. A professional inspection may add to the cost, but it can help you identify red flags and avoid larger costs down the road.
How can I avoid lease and purchase scams for business equipment and vehicles?
Unfortunately, scammers often try to take advantage of people seeking a vehicle or specialized equipment for their businesses. Always review any contract closely before you sign it. The following tips can help you avoid business scams:
- Check that the price is comparable to the current market rate. If a deal is too good to be true, do some extra research to make sure it is not a scam.
- Work with a reputable leasing company, dealership, or lender.
- Make sure all the paperwork is in order before paying or signing a contract.
- Get the deal in writing, and signed by everyone involved.
If you have questions about purchasing or leasing vehicles or equipment, new or used, reach out to a Rocket Lawyer network attorney for affordable legal advice.
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.