Buying v/s Leasing a Company Car: What is Best for you?

by | Jun 3, 2022

Buying or leasing a company car can drain company resources. However, factoring in critical variables, such as updated books and tax implications, can help you decide which is right for your business.

Many companies in Mississauga for buying or leasing a company car face this dilemma. So don’t panic! Yogi & Associates are here to help you guide which step to take. Also, you can make decisions depending on your bookkeeping records. So, always maintain your books. You can get our bookkeeping services if you need them.

1. What is Leasing a Car Means?

Leasing a car is like renting a company car. When you hire a vehicle, you can use it for a set time in exchange for a monthly payment.

There are restrictions with leases, which is a crucial difference.

  1. You can drive for a certain number of kilometers.
  2. There are penalties for leaving early.
  3. You have to pay for excessive use and tear when returning the car.
  4.  Because there are specific times when you can use the car, read your contract before agreeing.

2. How Does Leasing a Car Work?

A car lease works to a standard one-year or two-year lease. But it can last longer and gives you more options for purchasing a car at the end of your lease. When you lease a vehicle, your monthly payment depends on the duration of your lease. The longer your lease term, the more money you spend. You can buy the car or trade it in for another model at the end of your lease term.

3. Four Types of Lease:

There are four types of options to lease a company car:

  1. Standard Lease
  2. Lease to Own
  3. Lease a used Car
  4. Lease Takeover

1. Standard Lease:

A standard car lease requires you to make a down payment, but not always. A classic car lease ranges from 2 to 4 years, but a 3-year term is the most popular. You can extend the lease, return the car, or buy it when it expires.

2. Lease to Own:

It is an excellent option for people with bad credit who can’t get a car loan or want to own their vehicle. The lease payment can pay for your monthly bills as well as the resale value of the car, so you end up with shares in it.

3. Lease a Used Car:

Leasing a used car can be an excellent way to get started with your new vehicle. While most people rent new cars, there are some benefits to leasing a used car. Hiring a used car may result in lower payments than renting one. Some companies may also provide extra benefits such as roadside advice and funds.

4. Lease Takeover:

A lease takeover means transferring an existing contract from one person to another. Also, they usually reward you.

4. Pros of Leasing a Car:

The following are the advantages if you lease a company car:

  1. It has low monthly bills as compared to owning a car.
  2. You can upgrade your vehicle every year.
  3. You’re also protected against unexpected repairs or breakdowns if you lease your new car for three years.
  4. You don’t have to worry about any resale matters. You have to return the car.

5. Cons of Leasing a Car:

  1. You can’t drive where ever you want. You must pay a fee to change or upgrade your vehicle and give up ownership at the end of the lease.
  2. You can’t sell or trade in your car to lower the price of your next vehicle. Furthermore, when you begin a new lease, you will have monthly costs and a lack of control over some parts of a car.
  3. You must pay an excess mileage fee, repair fees, and a yearly mileage limit.

6. When is it Best to Lease a Car?

Here are some scenarios in which leasing may be appropriate.

  • You have a business and want to debit leasing costs from your taxes.
  • You do not want to spend on maintenance.
  • You like the new vehicles with high-end functions.
  • You can make the payments and aren’t concerned with the trade-in value.
  • Your driving skills are consistent with the lease kilometer limits.

7. What is Buying a Car Means?

Buying a car means taking the title to it. Once you buy a car, you have full ownership and maintain control of it through every stage of life. You can keep it as your new car or trade it when you replace it.

8. How does Buying a Car Work?

Most business owners finance their vehicles rather than buy them.  As a result, loan installments include both principal and interest. Yet, as you make monthly payments, the principal part of your loan will be reduced. You’ll have an asset once you’ve paid off your debt. However, you can keep, sell or pass on that asset.

For example: If you financed the vehicle, you could deduct the interest portion of your payments up to $300 per month. You can also take a Capital Cost Allowance (CCA) each year. In the first year, you can deduct 15% of the cost. In the second and third years, you can deduct 30% of the decreasing balance of the cost.

Years

CCA Calculation

CCA
Year 1 $15,000 x 15%. =$2,250
Year 2 $15,000 – $2,250 = $12,750 x 30% =$3,825
Year 3 $12,750 – $3,825 = $ 8,925 x 30% =$2,678

9. Pros of Buying a Car:

  1. When you own a car, you have complete control over its service and care. Furthermore, you are not required to pay excessive mileage or wear and tear fees.
  2. You can improve your vehicle, customize it with leather seats, or change the decor.
  3. Payment history is lower in buying a car than in leasing a vehicle.

10. Cons of Buying a Car:

  1. In the first five years of ownership, new cars lose up to 25% of their worth. This is a drawback to purchasing a vehicle as an investment.
  2. According to AAA, the average cost of driving 15,000 miles in a new vehicle is $9,666. This includes gas, insurance, and upgrading.

11. When is it Best to Buy a Car?

Here are some scenarios in which you should consider purchasing a vehicle:

  • If you will exceed the km limit in a lease car.
  • If you want to clear your earnings to meet other financial objectives.
  • If you are content to use the exact vehicle for an extended period of time.

12. Difference Between Buying v/s Leasing a Car:

Comparison Leasing Buying
Time The car is used for a specific time. Owns a vehicle which means the car can be used as long as one wants.
Bills Less monthly bills and fewer loans. Higher monthly bills and loans.
Expensive Expensive cars have one less price. High prices for expensive cars.
Limitations Limit on miles and updating. No limitations.
Costs Increased costs over time and various leases. Lower price when purchased and maintained.
Fees Fees can increase the cost of the lease at the end. No extra charges.

13. Company Cars for Business or Personal Use:

Company Cars for Business Purposes:

When you lease a vehicle, the business deducts the lease to pay and running costs from its taxes.

Company Cars for Personal Use:

An employer gets a tax benefit for providing a vehicle to an employee for personal use. According to the Canada Revenue Agency, driving a business car to and from work is deemed personal use!

14. Two Elements of Tax Benefits:

  1. Standby Charge Benefit.
  2. Operating Benefit.

1. Standby Charge Benefit

This benefit means employees receive help by having a vehicle given to them during the year.
You can determine the standby charge benefit by following:
  • 2% every month of the vehicle’s sale price.
  • A 2/3% calculation of the leasing costs depends on the days the employee has access to the vehicle during the year.

2. Operating Benefit:

Suppose an employee takes the vehicle for personal use. His annual tax income includes individual costs minus car use reimbursements. So, you can determine the cost-benefit by multiplying the number of private km driven in a year by the per km rate.

15. What Are The Tax Deductions For Buying Or Leasing?

For leased vehicles, it can deduct the monthly leasing pays from its corporate tax to $800 per month + GST/HST.
Suppose you buy a vehicle. A company will deduct the first $30,000 of the car’s cost from the company tax return under the CCA program. Furthermore, the company can remove the expenses of running your automobile, such as:
  • Costs of licensing and reiteration.
  • Oil and fuel.
  • Insurance.
  • Costs of repairs and upkeep.

To learn about GST/HST, you can look into the article on our website by clicking When should you charge GST/HST?

16. Know your Bookkeeping Records:

Knowing your bookkeeping to make financial decisions is essential. Bookkeeping ensures you have all your financial matters in order. It can help you decide what options are best for you. It will give you a clear picture of your current situation and its future implications. 

With our bookkeeping services, you will know exactly how much money you must spend on a new vehicle. We help determine if buying or leasing a car makes the most sense for your business.

FAQ’s

1. Is it wise to buy or lease a company car for tax reasons?

Buying a company car is more expensive than leasing. For small business owners, however, there is no definitive answer to this question.

2. Is maintenance still required when leasing a company car?

Yes, when leasing a car, you must still pay for maintenance. Tune-ups, maintenance, and part replacement parts are examples of such services.

3. Can I Lease a Car without Insurance?

Yes, you can lease a car without purchasing insurance. But, if you have damaged a leased vehicle, you have to pay for the cost of repair and maintenance.

Wrapping it up!

Deciding between buying and leasing a company car can be stressful. But don’t get confused, as Yogi & Associates are here for you! Our accountant will guide you in choosing your company’s best option before buying. So you can contact Yogi & Associates to seek help. We provide business incorporation services in Mississauga.

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