Should You Buy or Lease Your Next Vehicle?

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Buying or leasing tips

  • Shop wisely. Advertised deals may be too good to be true once you read the fine print. To qualify for the deal, you may need to meet certain requirements, or pay more money up front.

  • To get the best deal, be prepared to negotiate the price of the vehicle and the terms of any loan or lease offer.

  • Read any contract you’re asked to sign, and make sure you understand any terms or conditions.

  • Calculate both the short-term and long-term costs associated with each option.

After declining dramatically a few years ago, auto sales are up, leasing offers are back, and incentives and deals abound. So if you’re in the market for a new vehicle, should you buy it or lease it? To decide, you’ll need to consider how each option fits into your lifestyle and your budget.

The chart below shows some points to compare.

Buying considerations Leasing considerations
Ownership When the vehicle is paid for, it’s yours. You can keep it as long as you want, and any retained value (equity) is yours to keep. You don’t own the car–the leasing company does. You must return the vehicle at the end of the lease or choose to buy it at a predetermined residual value; you have no equity.
Monthly payments You will have a monthly payment if you finance it; the payment will vary based on the amount financed, the interest rate, and the loan term. When comparing similar vehicles with equal costs, the monthly payment for a lease is typically significantly lower than a loan payment. This may enable you to drive a more expensive vehicle.
Mileage Drive as many miles as you want; a vehicle with higher mileage, though, may be worth less when you trade in or sell your vehicle. Your lease will spell out how many miles you can drive before excess mileage charges apply (typical mileage limits range from 12,000 to 15,000).
Maintenance When you sell your vehicle, condition matters, so you may receive less if it hasn’t been well maintained. As your vehicle ages, repair bills may be greater, something you generally won’t encounter if you lease. You generally have to service the vehicle according to the manufacturer’s recommendations. You’ll also need to return your vehicle with normal wear and tear (according to the leasing company’s definition), so you may be charged for dents and scratches that seem insignificant.
Up-front costs These may include the total negotiated cost of the vehicle (or a down payment on that cost), taxes, title, and insurance. Inception fees may include an acquisition fee, a capitalized cost reduction amount (down payment), security deposit, first month’s payment, taxes, and title fees.
Value You’ll need to consider resale value. All vehicles depreciate, but some depreciate faster than others. If you decide to trade in or sell the vehicle, any value left will be money in your pocket, so it may pay off to choose a vehicle that holds its value. A vehicle that holds its value is generally less expensive to lease because your payment is based on the predicted depreciation. And because you’re returning it at the end of the lease, you don’t need to worry about owning a depreciating asset.
Insurance If your vehicle is financed, the lien holder may require you to carry a certain amount of insurance; otherwise, the amount of insurance you’ll need will depend on personal factors and state insurance requirements. You’ll be required to carry a certain amount of insurance, sometimes more than if you bought the vehicle. Many leases require GAP insurance that covers the difference between an insurance payout and the vehicle’s value if your vehicle is stolen or totaled. GAP insurance may be included in the lease.
The end of the road You may want to sell or trade in the vehicle, but the timing is up to you. If you want, you can keep the vehicle for many years, or sell it whenever you need the cash. At the end of the lease, you must return the vehicle or opt to buy it according to the lease terms. Returning the vehicle early may be an option, but it’s likely you’ll pay a hefty fee to do so. If you still need a vehicle, you’ll need to start the leasing (or buying) process all over.

Vehicles and Section 179

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One of the more popular uses of the Section 179 Deduction has been for vehicles. In fact, several years ago the Section 179 deduction was sometimes referred to as the “Hummer Tax Loophole,” because at the time it allowed businesses to buy large SUV’s and write them off. While this particular use (or abuse) of the tax code has been modified with the limits explained below, it is still true that Section 179 can be advantageous in buying vehicles for your business.

Vehicles used in your businesses qualify – but certain passenger vehicles have a total depreciation deduction limitation of $11,060, while other vehicles that by their nature are not likely to be used more than a minimal amount for personal purposes qualify for full Section 179 deduction. Here are the general guidelines for using the Section 179 Deduction for vehicle purchases (full policy statement available at: irs.gov)

Update / IRS Guidelines for Vehicles in 2013

The IRS has not yet released guidance concerning Section 179 and Bonus Depreciation as it relates to vehicles for the year 2013. The guidance will be published in the Internal Revenue Bulletin sometime after April 15th, 2013. So be patient, and check back here often for the release date.

Please note that there are a number of qualifications for vehicles, all with varying tax treatment.

What are the limits on Typical Passenger Vehicles?

For passenger vehicles, trucks, and vans (not meeting the guidelines below), that are used more than 50% in a qualified business use, the total deduction for depreciation including both the Section 179 expense deduction as well as Bonus Depreciation
is limited to $11,060 for cars and $11,160 for trucks and vans.

Exceptions include the following vehicles:

  • §Ambulance or hearse used specifically in your business;
  • §Taxis, transport vans, and other vehicles used to specifically transport people or property for hire;
  • §Qualified non-personal use vehicles specifically modified for business (i.e. van without seating behind driver, permanent shelving installed, and exterior painted with company’s name).

Limits for SUVs or Crossover Vehicles with GVWR above 6,000lbs
Certain vehicles (with a gross vehicle weight rating above 6,000 lbs but no more than 14,000 lbs) qualify for expensing up to $25,000 if the vehicle is financed and placed in service prior to December 31 and meet other conditions.

What Vehicles Qualify for the full Section 179 Deduction?

Many vehicles that by their nature are not likely to be used for personal purposes qualify for full Section 179 deduction including the following vehicles:

  1. Heavy “non-SUV” vehicles with a cargo area at least six feet in interior length (this area must not be easily accessible from the passenger area.) To give an example, many pickups with full-sized cargo beds will qualify (although some “extended cab” pickups may have beds that are too small to qualify).
  2. Vehicles that can seat nine-plus passengers behind the driver’s seat (i.e.: Hotel / Airport shuttle vans, etc.).
  3. Vehicles with: (1) a fully-enclosed driver’s compartment / cargo area, (2) no seating at all behind the driver’s seat, and (3) no body section protruding more than 30 inches ahead of the leading edge of the windshield. In other words, a classic cargo van.

Other Considerations

Vehicles can be new or used (“new to you” is the key).

The vehicle can be financed with certain leases and loans, or bought outright.

The vehicle in question must also be used for business at least 50% of the time – and these depreciation limits are reduced by the corresponding % of personal use if the vehicle is used for business less than 100% of the time.

Remember, you can only claim Section 179 in the tax year that the vehicle is “placed in service” – meaning when the vehicle is ready and available – even if you’re not using the vehicle. Further, a vehicle first used for personal purposes doesn’t qualify in a later year if its purpose changes to business.