When Deciding Whether To Buy or Lease a Vehicle

When deciding whether to buy a company car and utilize the Section 179 deduction or lease a car, there are several factors to consider. Below is a breakdown of the pros and cons of each option:

Option 1: Buying a Company Car and Utilizing Section 179 Deduction

Pros

1. Immediate Deduction

• Section 179 allows you to deduct up to $1,160,000 (2023 limit) of the cost of qualifying property, including vehicles, in the year the car is placed in service. This can provide significant tax savings upfront.
• For passenger vehicles, the Section 179 deduction is capped at $11,200 for 2023 if the vehicle is used more than 50% for business.

2. Ownership

• You own the car outright, which means no ongoing lease payments.
• You can continue to claim depreciation deductions for the remaining cost of the vehicle (if applicable) in subsequent years.

3. No Mileage Restrictions

• There are no mileage limits, unlike some lease agreements, which may restrict annual mileage.

4. Equity

• Once the car is paid off, it becomes an asset for the business, which can be sold or traded in later.

5. Flexibility in Use

• You can modify the vehicle (e.g., branding, shelving) without restrictions.

Cons

1. Upfront Cost

• Buying a car requires a significant upfront investment or financing, which can strain cash flow.

2. Depreciation Recapture

• If the business use of the car drops below 50% in a later year, you may need to recapture (repay) some of the Section 179 deduction as income.

3. Depreciation Limits

• For passenger vehicles, the total depreciation deduction (including Section 179) is limited annually. For example, in 2023, the first-year limit is $11,200 (or $19,200 if bonus depreciation applies).

4. Maintenance Costs

• As the owner, you are responsible for all maintenance, repairs, and insurance costs.

Option 2: Leasing a Company Car

Pros

1. Lower Upfront Costs

• Leasing typically requires a smaller upfront payment compared to purchasing.

2. Predictable Expenses

• Lease payments are fixed, making it easier to budget for monthly expenses.

3. Tax Deduction for Lease Payments

• You can deduct the business-use portion of your lease payments as a business expense. This is often simpler than calculating depreciation.

4. Access to Newer Vehicles

• Leasing allows you to upgrade to a newer car every few years, which can reduce maintenance costs and provide access to the latest technology.

5. No Depreciation Recapture

• Since you don’t own the car, you don’t have to worry about depreciation recapture if business use drops below 50%.

Cons

1. Mileage Restrictions

• Lease agreements often impose mileage limits (e.g., 10,000–15,000 miles per year). Exceeding these limits can result in additional fees.

2. No Ownership

• At the end of the lease, you don’t own the car, so there’s no equity or asset to sell or trade in.

3. Modification Restrictions

• You may not be allowed to make modifications to the vehicle, such as adding branding or shelving.

4. Ongoing Payments

• Lease payments continue for the duration of the lease, and you may face penalties for early termination.

5. Higher Long-Term Costs

• Leasing can be more expensive over the long term compared to buying, especially if you lease multiple vehicles over time.

Key Considerations

1. Business Use Percentage

• If the car will be used more than 50% for business, buying and utilizing Section 179 may be more advantageous.
• If the car will be used less than 50% for business, leasing may be better since Section 179 and bonus depreciation are not available for cars used 50% or less for business.

2. Cash Flow

• If cash flow is tight, leasing may be a better option due to lower upfront costs.

3. Mileage

• If the car will be driven extensively for business, buying may be better to avoid mileage restrictions.

4. Long-Term Plans

• If you plan to keep the car for many years, buying may be more cost-effective.
• If you prefer to upgrade vehicles frequently, leasing may be more practical.

5. Tax Implications

• Buying allows for upfront deductions (Section 179 and depreciation), while leasing spreads deductions over time.

Recommendation

• Buy and Use Section 179 Deduction if:
• You want to maximize upfront tax savings.
• You plan to use the car for more than 50% business use.
• You want to own the car as a long-term asset.
• Lease if:
• You prefer lower upfront costs and predictable monthly payments.
• You don’t want to worry about depreciation recapture or maintenance.
• You plan to upgrade vehicles frequently or have limited cash flow.

Ultimately, the decision depends on your business’s financial situation, cash flow, and long-term goals.