Leasing Car for Your Small Business, Reap These Tax Benefits
I have recently decided to open my own business. Thus, the question came up whether it will be better to lease a car for my business especially concerning tax deductions. Many of my business friends use car leases for their businesses. I also noted that there is an ever-growing popularity among business owners for leasing.
Still, I wanted to make sure that it will be the right thing for my business. I looked at the low monthly cost which is very attractive, as well as the ability to frequently change cars and keep up with safety features and new technology.
But to make sure it will work, I have decided to contact my accountant for information about the tax benefits. The following is how he explained it to me so that I can decide if it will work for me. Maybe this will help you as well.
First of all, know and understand the terms to negotiate a car lease
When sitting down with a dealership to negotiate for leasing your company car they will offer you one of two options. You can look at either an open or closed lease deal.
The difference between open and closed lease deals
When I decide to take a contract for an open lease, primarily used as a business car lease. This means that I will pay the difference at the end of the term, between the estimated resale (residual) amount, and what the actual value for resale will be.
If I used the car more than what was estimated, this resale value might be low, and it means that I will have to pay more.
With a closed lease deal, I will only be responsible for paying for the extra mileage during the period, as well as for any extraordinary damages during the lease period.
Consider the length of your lease term
A shorter lease term can cost you more than what leases for a long-term would. This is because most cars lost their residual value faster within the first two years. Usually, a leasing company will offer you twenty-four, thirty-six or forty-eight months leasing terms.
You need to estimate your mileage usage before you lease a car
Make sure before leasing your business car that you estimate the mileage for annual usage. Normally with a lease, you will be allowed to use about twelve thousand miles per year. If you know that you will use more than that, it is wise to pay extra for those additional miles instead of paying it when your lease contract expires.
Leased cars for your business and taxes
In any business, your financial matters such as taxes should be taken into consideration. It’s important to maximize your deductions.
Leased cars and your income taxes
You can’t claim depreciation on a leased car as a business but you can deduct all driving costs under specific circumstance within limits.
If you don’t use your lease car purely for business use, you should at least drive it fifty percent or more just for business related matters. In this case, you will need to give proof of the amount and periods that you used the car for business because you can only deduct the costs while used for the business.
It’s important to use the method of actual costs and not standard deductions in order to calculate your deductions for driving, as well as your lease payment cost deduction.
For your sales tax purposes
Leasing your business car won’t eliminate the sales tax that you need to pay. Therefore, you should keep the lease price as low as possible to pay a lesser amount on your sales tax.
Actual tax expenses you can claim for on a lease car
The following driving cost on a lease car for your business that you can deduct includes these listed.
Your monthly payment on the lease
Any fees for parking
Garage renting fees
Oil and repairs you have done
Insurance and license fees
Registration fees of your car
This was the main points about tax deductions for leasing a car for my business. After I compared it to buying a car I understood what the difference was. I certainly decided that leasing my business car was in my best interest, and I hope this can help you if you want to start your own business.