Businesses and individuals face a common car dilemma when it comes to new cars -
lease versus buy, buy versus lease.
When it's a vehicle for business purposes, there are even more aspects to consider.
Two issues tend to rule debate on the subject, however -- tax liability and cash
flow.
According to Leaseguide.com, an Internet auto leasing service, of the 15 million
new cars and trucks set to roll out of showrooms, more than one-third of them -
or more than 5.4 million - are leased. When it comes to vehicles costing more
than $40,000, 61 percent are leased.
Leasing offers a variety of benefits and advantages for businesses, including maximizing
cash flow, simplifying accounting processes and freeing up bank lines of credit.
Full service leasing companies not only serve as a source of funds, but also as
an equipment expert and asset management tool. The consumer side of our business
writes a large number of leases at an average size of $35,000 per lease. The
majority of leases on the business side range in size from $100,000 to $2 million.
The top 10 states for auto and business auto leasings by total Uniform Commercial
Code filings are California, Texas, Illinois, Ohio, Pennsylvania, Oregon, Missouri,
Washington, Kansas and Connecticut.
Leases and loans are simply two different methods of automobile financing.
One finances the use of a vehicle; the other finances the purchase of a vehicle.
Each has its own benefits and drawbacks and the decision depends on individual situations
and preferences.
A purchase pays for the entire cost of a vehicle, regardless of how many miles it's
eventually driven.
Buyers typically make a down payment, pay sales taxes in cash or roll them into
a loan and pay an interest rate determined by the lender. The first payment
is made a month after the contract is signed.
When leasing, only a portion of the vehicle's cost is what's being purchased - the
portion "used up" during the time it's driven.
Leasing also includes the option of not making a down payment, paying sales tax
only on monthly payments in most states and payment of a money factor similar to
the interest rate on a loan. Leases may also include extra fees and possibly
a security deposit, items not part of a direct purchase. First payments are
made at the time the contract is signed.
Acquiring a new auto is a major business expense. The decision is complicated
by the variety of financing options available, as well as by a number of tax considerations.
According to the American Institute of CPAs' Journal of Accountancy, taxpayers engaged
in a trade or business - including business entities, the self-employed and in some
cases employees - may receive tax savings from business use of an auto because they
can deduct such expenses when computing taxable income.
For the self-employed, the tax savings include not only income tax savings, but
also self-employment tax savings, ranging from 2.9 percent to 15.3 percent.
Taxpayers may elect to use the standard mileage deduction of 34.5 cents, or they
may choose the "actual expense" method. Interest expense on a purchased auto
is deductible as trade or business expense.
The short-term monthly cost of leasing is less than the cost of buying. For
vehicles with the same price, term and down payment, monthly lease expenses will
be 30 percent to 60 percent lower than loan payments.
The mid-term cost of leasing is about the same as the cost of buying, assuming the
buyer eventually sells the vehicle.
Comparisons can show buying as costing a little less than leasing because of fewer
fees and the assumption that a purchased vehicle will return full market value if
it is sold or traded at the end of the loan. If, however, the benefit of investing
monthly lease savings is factored in - a scenario that could be important to the
life of a business - the net cost of leasing can be less than buying.
The long-term cost of leasing is more than the cost of buying, assuming the buyer
keeps the vehicle. If a buyer keeps the car after the loan has been paid off
and drives it for many more years, the cost is spread over a longer term.
The cost of buying one car and driving it for 10 years is less expensive than leasing
five different cars over the same period.
Leasing is a major part of Signature Leasing's business. 80 percent of all businesses
lease at least some of their autos or equipment - and "fleets" range in size from
two to more than 2,000 vehicles.
For those who want lower monthly costs and like a driving a new car every two or
three years, but are willing to pay more over the long haul for those benefits,
it's a lease.