Should You Buy or Lease a Car for Tax Deductions?

Buying or leasing a car can be a difficult decision for both individuals and businesses. A number of factors play into tax deductions for a business car. Things such as the definition of business use, the types of expenses claimed and methods of calculating deductions play an important role, in addition to whether or not you buy or lease your car.

When you decide to lease a car, you will require less cash even if you do decide to finance the purchase. For example, if you decide to lease a car that costs $20,000, you will likely only have to pay $10,000 over a 3 year period. However, when you look at this from a tax standpoint, there is a limit on the monthly lease payment that you will be able to deduct.

In order to arrive at a decision on whether to buy or lease a car, you must understand four things: Finance Lease, Hire purchase, sales tax implications and business structure.

Finance Lease

With finance lease, you as the lessee are responsible for that car’s running costs, maintenance and repairs. Although you will be using the car as if you do own it, you are not the actual owner of the car when the lease comes to an end. If you wish to own the car at the end of the lease, you will have to part with a significant amount of money. Since you are not treated as the actual owner of the car as far as taxes go, you cannot lay claim to capital allowances during the period of use. You can, however, claim your lease payments when you go the depreciation route.

Hire Purchase

When you opt for a hire purchase, you are hiring a car with the option of buying it at the end. With the agreement in hand at the end of the term, you should be able to claim capital allowances, since you will be treated like you actually did buy the car in the first place. With a hire purchase, you should be able to get a tax deduction up front.

Sales Tax Implications

When you understand your local sales tax implications, you will be in a better position to decide which the best option is: finance lease or hire purchase. Depending on your region, businesses might be eligible to recover as much as 50% of the sales tax on lease payments for cars that are held on a finance lease.

Business Structure

Your business structure does play a huge role in whether you buy or lease a car. In case you are a sole trader, then any capital allowances that you claim will be reduced for personal use. In such an instance, you may be better off claiming for mileage as opposed to claiming for the costs of the car. As a limited company owner on the other hand, if the business pays for the car then you will have to include the benefit in kind on your company car on your self-assessment tax return. You will also have to pay any tax that arises. The list price of the car as well as the emissions does play a big role in the benefit in kind.

Factors that Play into Tax Deductions

There are quite a few factors that play into tax deductions, such as:

• Mileage: There is a standard mileage deduction rate. You can deduct accrued mileage whether you own or lease a car.
• Repair Costs: It is possible to deduct repair costs for maintaining a car where it is owned or leased.
• Tolls and Parking: Both owned and leased cars are eligible for a deduction on toll costs and parking fees.
• Depreciation: Depreciation is what separates a leased and owned car as far as deductions are concerned. In case you own the car, then you can deduct the depreciation value over the life of the car. On the other hand, if you lease the car then you are not eligible for depreciation tax deductions.

Ultimately, for tax deduction purposes, you should carefully consider the pros and cons of buying or leasing a car before doing so. However, if there are a few things you’re unsure about, it’s highly recommended to hire an accountant to help you take advantage of as many tax benefits and incentives as possible.

Author: Jason Pikeman writes to us from GoWrench Auto. They are a mobile auto repair service from Hamilton, Ontario. Jason has tons of experience working as an accountant with various automotive companies in the past and he loves to share his knowledge and experience.