Businesses weigh lease vs. purchase options

Figuring out the best option, however, is not simple, as many tax and financial considerations come into play.

Lease deals

Perhaps the biggest reason to consider leasing company vehicles is the tax write-off opportunity.

Jeff Russell, president of Russell Cellular, has leased several new company vehicles in recent years.

“You can write off 100 percent of the lease payments, plus any gas and maintenance costs,” Russell said. “On a purchased vehicle, you have to take out the depreciation, so when it comes to monthly expenses there’s an advantage to leasing.”

Tarry Shebesta, president of Ohio-based Automobile Consumer Services Inc. and the nonprofit National Vehicle Leasing Association in Virginia, said most leases show up as operating expenses rather than depreciating assets – and operating expenses are usually tax-deductible.

If a business has to borrow money to purchase the vehicle, Shebesta added, that loan can reduce the amount of credit available to the company from other creditors.

Another lease advantage: Many agreements allow the lessee to set the car’s residual value – how much the car will cost to purchase outright once the lease is over.

“If you set the residual value at $10,000, but the car is worth $15,000, you can sell the vehicle at $15,000 and recoup that extra $5,000,” Shebesta said. “It does make the (monthly) payment higher, but you’re writing off that payment anyway.”

Accountant Joe Page of Springfield-based Whitlock, Selim & Keehn LLP said there are two types of leases to consider. Operating leases are usually used to acquire capital on a short-term basis, and capital leases require the capital to be set up as an asset, with the accompanying tax liabilities, even though the business doesn’t technically own the vehicle.

“If it meets the criteria for a capital lease … they have to report a liability for the present value of those payments, which sometimes is a negative for financial reporting purposes,” Page said. “Many times, (owners) look hard at how those are structured.”

Purchase powers

Vehicle purchases also carry write-off advantages but only after meeting the minimum weight – equal to a standard half-ton pickup truck.

Page and fellow Whitlock, Selim & Keehn partner David Myers pointed to the Internal Revenue Service’s magic number of 6,000 pounds for commercial vehicles before companies can write off the first $25,000 of the purchase.

“If you run the numbers, it’s pretty rare that a lease will come out better for tax purposes (when purchasing a large vehicle),” Myers said. “I’ve seen it happen – like if the finance company is running a special to try to get more leases on the books, it can work better – but it’s pretty rare.”

For smaller vehicles, however, Myers said tax rules offer positives for both buying and leasing.

Small vehicles carry a cap on the amount of available annual depreciation, extending the length of time required to remove a purchased vehicle from the company books. But small cars also produce a cap on the amount of monthly lease payments that are tax-deductible.

Interest rates also come into play, as Ozark Laser & Shoring co-owner Ryan Zweerink discovered while looking to replace about a third of his company’s fleet. Zweerink said some auto manufacturers have zero percent interest rate offers.

“The lease packages were appealing with the full maintenance program and the lease expense (being) off the balance sheet, but the low interest rate set the two apart,” said Zweerink, who is still shopping.

Mileage considerations

When considering used vehicles, Russell Cellular’s Russell noted that it’s important to calculate each vehicle’s anticipated annual mileage. In the last four years, he has purchased about 50 used company vehicles without lease options from Springfield-based Wheelerauto.com.

But for his company – where employees don’t put exorbitant numbers of miles on the cars – Russell said leasing is a better option “as long as you’re not a heavy mileage person. I drive about 15,000 miles a year, so that’s perfect for a lease.”

Those mileage limits are part of the reason commercial customers of Scott Nimtz, fleet manager for Thompson Sales in Springfield, usually buy their vehicles.

“Most of my customers buy vehicles and pay cash, because there’s usually a mileage limit on leases,” he said. “The big majority of my commercial customers purchase their vehicles outright, and they keep them until the last dog has run.”[[In-content Ad]]