Tax deductions and business vehicle leasing

Tax deductions and business vehicle leasing

Many companies that run fleets prefer business vehicle leasing these days. It’s not hard to figure out why. 

The benefits are plentiful. You can preserve your capital, save on costs, and there’s typically much greater flexibility when it comes to replacing vehicles

But how does it work in terms of deductible vehicle expenses, or tax deductions? Well, there are also some advantages there too, and we’ll try to tell you all the key points so you can make a better informed decision that’s right for you and your business.

Business vehicle leasing: an introduction

In the not-so-distant past, business vehicle leasing was sometimes a dirty word (or three words for that matter) in vehicle management. But increasingly lots of companies are going this way. Why is that? Well, there are many reasons why you may examine this option. You may be either:

What do you need to consider before you make a decision? First and foremost, you business needs. For example, how many customers do you serve, or plan to serve? Do you plan to hire extra personnel? Or just aim to retain the good fleet drivers you have on your books? How many vehicles do you need? And how long do you plan to keep them? Do you need really specialized vehicles?

All of these things need to be considered before making your decision.

And of course there’s the really basic bottom line question. Your initial budget: how much money you want to make available, or have available, for an initial payment. And then if leasing do you have enough to cover monthly rental fees, etc.

Once you have established what your needs are, and also if they change over time (i.e. increased needs during holidays or any other seasonal periods), then you will have a clear idea of whether or not it makes sense to buy vehicles or turn to business vehicle leasing.

Nine times out of 10, it will be more worthwhile overall to use leasing, especially if you are a smaller business or have/plan to have a small fleet.

Where should you turn to? 

Let’s have a brief look at what your options are in terms of suppliers. Thankfully, where leasing is concerned, there are usually plenty of choices available since there is a lot of competition for your business.

There are a variety of sources to secure business vehicle leasing, and of course each one has its own set of benefits and parameters, but these are the main ones:

  • Automobile manufacturers
  • Independent leasing companies,
  • Local dealerships  
  • Other financial institutions such as banks, etc

Pros of business vehicle leasing

There are many benefits from choosing leasing, as we have previously discussed in a previous post, there are so many benefits in that decision. In the main, the key reasons in favor are:

  • A full-service lease means you are completely covered for registration, insurance, maintenance, repairs, and accident management. That’s a lot of cost savings right away.
  • No hefty downpayments are required
  • Monthly payments/installments are typically fixed, which helps your budgeting projection planning
  • You can usually upgrade your vehicles every 3-5 years
  • Your leasing payments can also be part-expensed from the company’s VAT if used for business only

Cons of business vehicle leasing

  • You will not own the vehicle and therefore build equity
  • Leasing will limit your options in terms of modifications you may want to do, such as upfitting
  • If you exceed agreed mileage limits, or experience excessive wear and tear, then you will have to pay penalties

As a rule of thumb, business vehicle leasing will also demand slightly lower monthly installment payments versus buying out right. Still, you need to be aware of small print in your contracts and the various possible “add-on” charges for things like early termination of contract, going over your agreed mileage limits and excessive wear and tear.

Tax deductions

On tax deduction matters, you will have several key questions in mind. But in essence, the main thing you want to know will be what tax deductions do I qualify for business vehicle leasing? There are some clear guidelines from the IRS which are worth noting.

If I lease a vehicle, can I deduct the cost of the lease payments plus the standard mileage rate?

If you lease a car you use for your business, you may not deduct both lease costs and the standard mileage rate. You may either:

  • Claim actual expenses, which would include lease payments. If you choose this method, only the business-related portion of the lease payment is deductible.Or you can:
  • Deduct the standard mileage rate for the business miles driven. If you choose this method, you must use the standard mileage rate method for the entire lease period(including renewals).

Not bad right? If you are wondering about how you will track your mileage, etc, as well as other business-related issues related to your fleet of vehicles, here’s where we at Veturilo can help. Our vehicle management app, which is designed with small to medium-sized businesses in mind, can help you log all of your business mileage accurately and effortlessly. It can also help you track a wide range of parameters to determine deductible expenses if you are a contractor

Sounds interesting? For any further questions or issues please feel free to contact us to see how you can get started today.

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