ELITE ADVISOR BEST PRACTICES
Ten Factors to Help Clients Decide Between Buying and Leasing a Business Vehicle - Part Two
Most small-business owners simply don’t understand the subtle tax and financial nuances involved in making a smart decision. Here’s your opportunity to shine.
By Glenn Demby
- Small-business owners need to understand the advantages and disadvantages of each option so they can determine what makes sense for their own particular situation.
- The problem is that most small-business owners simply don’t understand the subtle tax and financial nuances involved in making a smart decision.
- That makes it incumbent upon financial advisors to help their small-business clients decide between leasing and buying.
In Part One of this article, we discussed what clients get for their money, what they should pay up front, what they should pay per month, what they should pay in non-tax depreciation, and which tax deductions they can and should get. Let’s now look at what happens when clients get rid of the vehicle, what they pay for excess mileage and wear, how much flexibility they need, and other personal considerations.
Factor 6: What happens when they get rid of the vehicle
If your client exercises the purchase option at lease end, the tax consequences are those associated with the purchase of the previously owned vehicle; if not, the client can take tax deductions for the costs of escaping from the lease.
There are also non-tax financial consequences.
Buy: When clients buy the vehicle, they can get rid of it any time they please. The amount of money they get for the sale or trade-in is theirs to keep (or apply to the cost of a new vehicle).
Lease: When the lease expires, they can either return the vehicle or buy it for an option price set in the lease.
Weighing the options: Clients also pay fees when returning a leased vehicle, including charges and fees for excess mileage or damage beyond normal wear and tear—dealers often inflate these fees to pass along the risks of higher-than-expected depreciation.
Factor 7: What they pay for excess mileage
Buy: When clients buy a vehicle instead of leasing, they can drive it wherever and whenever they want—there are no limits!
Lease: Leased vehicles are subject to annual mileage restrictions—generally between 12,000 and 15,000 miles. If actual mileage exceeds these limits, clients must pay a fee at the end of the lease.
Weighing the options: The tax and other financial savings of leasing may be wiped out if the client plans to drive the vehicle more than 15,000 miles per year. Of course, the client can also negotiate for higher mileage limits, although he or she may have to accept a higher monthly payment in return.
Factor 8: What they pay for excessive wear
Buy: When clients buy a vehicle, they can abuse it all they want. In addition to tangible financial advantages (e.g., not having to pay for damage beyond wear and tear), the freedom to ride a vehicle as hard as you want bestows psychological benefits that are hard to calculate.
Lease: Clients must return the vehicle without (or pay for any) serious damage beyond normal wear and tear.
Weighing the options: Although buyers don’t pay fees for it, vehicle damage reduces its resale/trade-in value. So there are economic incentives to keep the vehicle in good condition whether it’s leased or bought.
Factor 9: Flexibility
Buy: It’s generally easier to qualify for a vehicle loan than for a vehicle lease. And once they buy a vehicle, clients are free to dispose of it however and whenever they want—as long as they’re not upside down on the loan.
Lease: It’s hard to escape or modify a lease before its term expires. Dealers charge up to six months’ of payments in early termination penalties.
Weighing the options: Clients should stay away from leasing if their credit rating is low and/or they want maximum flexibility.
Factor 10: Personal considerations
Buy: Buying a vehicle is a fairly straightforward transaction, especially if the client doesn’t finance it. And other than the service department, clients generally don’t need to remain involved with the dealership unless and until they decide to buy another vehicle from it.
Lease: Leases are fairly complex transactions that can require closer contact with and, alas, greater trust in the dealer or the lessor. And because leases expire, clients may need to spend more “quality time” with the dealer.
Weighing the options: As a personal preference, leasing is best suited to your clients who:
- Don’t like the vehicle-buying experience but don’t mind dealing with dealers
- Want to get a new vehicle every few years
- Want to drive more expensive vehicles than they could otherwise afford to buy
Summing it up
The chart below offers a handy visual summary of the key factors you should advise your clients to weigh when deciding whether to buy or lease a vehicle for their small businesses.
This article was adapted with permission from MurrayBradfordTaxInstitute.com, a site dedicated to helping self-employed taxpayers and one-owner businesses save on taxes.