No sensible company would want to commit its capital unnecessarily. In a volatile global and even local business climate, cash flow can play a decisive role in the success and survival of any business enterprise. That is why car leasing is becoming the need of the hour for the companies.
While businesses are still learning the flexibility and affordability that comes with car leasing, it has never been easier for SMEs to drive away with a new vehicle.
We will explain in this article the key considerations when leasing a car for your business:
Understanding Tax Deductions
Lease offers savings in the form of tax incentives to the businesses. Let’s say your business has some cash on hand to acquire vehicles. When you make a purchase, you are actually paying with post-tax dollars. A $50,000 item may cost you as much as $70,000 or $80,000 depending upon your tax situation. Why? Your business needs a greater pre-tax income to net the $50,000 needed to acquire the new vehicle. But when you lease the same car, you are doing so with pre-tax dollars. That $50,000 car lease costs your business $60,000 and your lease payments can be written off as a business expense.
There is one more gain that you get when you lease a vehicle over buying one. It is related to the disposition of the vehicle. When you dispose of a business vehicle that you own, you are liable to a taxable gain or deductible loss. The portion of any gain that is due to depreciation will be taxed as ordinary income. But when you return your leased car to the dealer, there is no taxable gain or loss.
Leasing Improves Cash Flow
Leasing a car rather than buying one can spare extra cash for the business to invest more profitably in other projects. The extra money could be used to lease a car for business trips or staff. Alternatively, the company may use the money saved by leasing to take on a new member of staff. This will help the company grow, in turn benefiting every employee of the company.
Buying car would be like getting into capital-intensive area. Saving money through leasing can give you an extra line of credit and help you save cash on a depreciating asset.
Drive the Latest Cars
If you have a policy of offering a car to your employees as your employee’s package, then leasing can save you a lot. You won’t need to buy a car from an auction for this purpose. With leasing, you could go for a brand new model. Also, new cars have advanced safety features and technology. The latest car models provide reliability, durability, and fuel economy. Your business and staff will benefit greatly from these features. It will help you lower the expenses on staff tours as well as company car tax issues.
Finally, a new vehicle from a premium brand can speak volumes to the clients or customers about a company’s aspirations and the quality of its work.
Running Costs
Leasing a new car has an added advantage of low running costs. It’s worth considering running costs from a business perspective. The new technology of the car means they will lower your fuel expenses as compared to the older models. And at $1.50 per liter, 10mpg better economy can mean the company is $550 better off over 12,000 miles.
In terms of maintenance, the first three years of a vehicle’s life are usually the most reliable. Most of the cars are under warranty in these years. This means there will be fewer repair bills. In case a problem occurs, the manufacturer’s warranty will normally cover fixing faults. With car leases able to include maintenance packages too; overall, it makes for a cheap and very easy ownership proposition.
Parting ways with the old car
There is no hassle at the end of the lease agreement either. You do not need to negotiate with sharp-suited used-car dealers. All you do is hand the car back and you can then simply lease another car.
In case you want to get out of the lease early for some business reasons, then instead of placing an ad and fielding endless calls from other car sales outlets, you can simply put your leased car deal online on Quitalease and respond to any potential buyer without any trouble of going out. This will help you not only save money on early lease termination but also find you the potential buyers to take over your lease.
Final words
There are still two concerns that need to be addressed for the small companies:
First: Does the company want to show the car as an asset?
Second: Should the car be leased through the business or privately?
Answering the first question is realistically for the company’s accountant as each company has their different financial circumstances.
As for the second question, business car leasing is normally cheaper than personal car leasing. However, employees who have the facility to use company cars may face some kind of tax as in the UK there is a Benefit In Kind (BIK) tax. However, this tax is not applicable to the vehicle that is leased privately or to owners of a business such as a sole trader or a partnership. There will still be some adjustments required to the individual’s taxable profits to calculate the private use element of all costs. Here again, it is advised to consult your accountant who can give specific recommendations regarding the lease and its implications for the company.