Many business owners need to travel for work. Whether you’re a contractor driving from job site to job site on a daily basis, a real estate agent taking clients to showings, or a dentist who occasionally visits the bank or office supply store.

At some point, you may have wondered whether you should lease or buy a car for business. Like most things in the tax world, the answer is “it depends.” (Cue the collective sigh.)

But don’t worry—in this article, we’ll walk through the considerations to help you make the best decision for your business.

Leasing a business vehicle

The advantage of leasing a car for your business is that you can deduct lease payments, reducing your taxable income. Plus, leases usually require a lower down payment and monthly payments than buying, helping you manage cash flow.

However, to fully deduct lease payments, you must use the vehicle solely for business purposes. If you use it for both business and personal purposes, you can only deduct the business portion of your lease payments.

For example, say you’re a photographer and you lease a vehicle. You drive that vehicle to different sites around town for photo shoots, but you also use it to pick up your kids from school, go to the grocery store, and take family road trips. In that case, you need to track each trip to determine what percentage of your lease payment is a business expense and what percentage is personal use.

If you lease a particularly expensive vehicle, you might have to add an “inclusion amount” to your taxable income. This lease inclusion reduces your lease payment expenses, and it’s based on the value of the car you lease.

For example, for the 2024 tax year, if you lease a passenger vehicle with a fair market value (FMV) between $62,000 and $64,000, you need to add $7 to your taxable income the first year of the lease, $16 during the second year of your lease, $24 for the third year, $28 for the fourth year, and $32 for the third year. Those numbers might not seem like much, but they increase as the FMV of the vehicle goes up.

You can find the threshold for adding an inclusion amount to your taxable income and the amount to add in IRS Rev. Proc. 2024-13 for the 2024 tax year and IRS Publication 463 for leases begun in prior tax years.

Downsides of a leased car

There are other downsides to leasing that might impact your decision as well, such as:

• No ownership equity. At the end of the lease, you don’t own the vehicle—you’ve just paid the leasing company for the privilege of using it. Think of it like renting an office space instead of buying the building.
• Mileage restrictions. Most leases have mileage limits (typically 12,000 to 15,000 miles per year). Exceed that, and you’ll pay per mile—usually at a not-so-friendly rate.
• Wear-and-tear fees. Lease agreements expect you to return the car in good condition—which is open to interpretation. Expect extra fees if the vehicle looks like it’s been through a demolition derby.

Buying a business vehicle

Buying means you own the car outright (once you pay off the loan, of course). And if you take out a car loan, you can deduct the interest portion of your monthly car payments.

However, just as with a leased vehicle, you can only deduct the business portion if you use the car for business and personal use. For example, if you use the car 75% of the time for business and 20% for personal use, you can deduct 75% of the interest paid on the car loan.

Other advantages of buying include no monthly payments once you pay off the car loan, no mileage penalties, and no extra charges for dings and scratches.

Depreciation on a company vehicle

You can also claim a depreciation deduction to account for wear and tear on the vehicle over time. Many car dealerships promote the tax benefits of buying a car for business, promising you can write off 100% of the cost on your business taxes using tax breaks like Section 179 and bonus depreciation. However, these benefits aren’t available on every business vehicle purchase.

First, you have to use the vehicle 50% or more for business. Plus, the Internal Revenue Service limits the amount you can write off in the first year for most vehicles. For the 2024 tax year, the deduction limit for vehicles with a gross vehicle weight rating (GVWR) under 6,000 pounds is $20,400 in the first year, including both Section 179 and bonus depreciation.

The first-year cap for heavy vehicles (GVWR between 6,000 and 14,000 pounds) is $30,500. Only vehicles over 14,000 pounds and other work vehicles clearly for business use, such as shuttle buses, cargo vans, and ambulances, are eligible for 100% expensing.

The depreciation rules for vehicles are complicated, so it’s a good idea to discuss the potential tax deductions with your accountant before you buy.

Downsides of a car purchase

Of course, there are downsides to buying a car, such as:

• Higher monthly costs. If you finance the purchase, monthly car loan payments may be higher than monthly lease payments. That can tie up cash flow you could use elsewhere.
• Depreciation. Vehicles lose value the moment you drive them off the lot. (Harsh but true.) If resale value is a concern, buying a business vehicle might not be the best option.
• Maintenance costs. Once warranties expire, repairs and routine maintenance costs come straight out of your pocket. And if you’ve ever had to replace a transmission, you know that’s not cheap.

So, should you buy or lease?

There’s no one-size-fits-all answer to the buy or lease question. It comes down to how you plan to use the car, how much cash you have on hand, and the potential tax advantages.

Here are a few questions to ask yourself before you make the decision:

• How often do you want to upgrade to a new car? If you like upgrading every few years, a leased vehicle may be the way to go. Buying a car makes more sense if you’d rather keep a vehicle long-term.
• How much do you drive? If you put a lot of miles on your vehicle, buying may be better—leasing mileage fees add up fast.
• How’s your business cash flow? Leasing a car frees up cash flow with lower monthly payments. The down payment for buying a company car is a bigger upfront investment.

If weighing the potential tax benefits, cash flow impact, and how you plan to use the business vehicle makes your head spin, reach out to us. We love it!