To Lease or to Buy, Which is Right For You?
You finally found the ultimate business lease versus buy analysis! A proper business lease versus buy analysis looks at vehicle use, utilization, cash, tax and fleet administration.It is important to understand how the lease versus buy decision fits into your overall strategy and whether it is aligned with your corporate goals. Define what you are trying to accomplish. Is it cost savings, capital preservation, tax benefits, and/or cash flow?
Lease Versus Buy for Businesses and Non-Profits – Evaluate what is right for your organization correctly
You finally found the ultimate business lease versus buy analysis!
A proper business lease versus buy analysis looks at vehicle use, utilization, cash, tax and fleet administration.
It is important to understand how the lease versus buy decision fits into your overall strategy and whether it is aligned with your corporate goals. Define what you are trying to accomplish. Is it cost savings, capital preservation, tax benefits, and/or cash flow?
Every other lease versus buy analysis assumes these items:
- Consumer leasing structure
- As a result of #1, only works for low mileage users.
This is false. So keep reading!
Leasing works in these situations:
- The vehicle is a car, truck, SUV or commercial vehicle.
- Your goal is lower payments.
- You are a consumer or company with decent credit
- You drive a lot of miles on vehicles. Leases can be written for over 50,000 miles/year. Myth busted!
- You don’t know how long you will keep the vehicle.
- You need to customize, upfit, or wrap the vehicle.
- You use the vehicle personally, for business, or any combination.
- Your goal is to save sales tax.
- Your goal is to maximize income tax benefits (business or business use)
Leasing is a slam-dunk if:
- Your business use is over 50%
- The vehicle costs over $16,500
The lease versus buy decision starts with a cost analysis and should look beyond cost. The two key factors to a proper lease versus buy analysis are:
- CASH – what you spend in capital for each option
- TAX – what income tax and sales tax benefits come with each option
Generally, the cash analysis will be within several hundred dollars in both scenarios. The advantage generally leans towards leasing once you take the income and sales tax considerations into account, but can vary based on vehicle type and relevant tax treatment.
Comparing a lease and finance of the same term is a valid comparison against a cash purchase. Compare acquisition costs (which are often lower when leasing for businesses), calculate total payments over time(make sure you have an apples-to-apples comparison with lease term and down payment when comparing lease versus buy), minus resale value equity.
- Acquisition costs – This is what you pay the dealer including sales tax if you purchase a vehicle. If you lease vehicles through a fleet management company, businesses can take advantage of large fleet rebates, buying power, and relationships with suppliers. Factory ordering can further reduce costs. This figure should include out-the-door costs including document fees, taxes, etc.
- Resale Value or Residual Value – This is what you sell the vehicle for at the end of the term. In the case of a purchase, you may consider trading in the vehicle. Fleet management firms are adept at reselling vehicles at the end of the lease resulting in 10-30% higher sales proceeds. In most business leases, this additional equity is returned to the lessee – your company. Fleet management firms work with many sources versus just one or two dealers with whom your business may have a relationship including auctions where 20 bidders bid on each vehicle and drives prices up.
- Monthly payments – You only pay for what you use through leasing, not the entire purchase price. Payments are notably lower for this reason and cash tied up in each vehicle is significantly reduced. When you purchase a vehicle, you pay for the entire cost of the vehicle and the higher monthly payment builds equity after several years. You pay more and you build more equity long term. Be careful – financing contracts often last 60 – 84 months. Amortizing vehicles that depreciate very quickly over such a long term is dangerous. The intent is always to lower payments but there are many consequences when negative equity results and your company either must take a large cash loss to sell each vehicle when you ideally wish to OR you are compelled to keep vehicles longer than you ideally would. This typically drives up maintenances costs and down time.
Factors to consider when analyzing the monthly payments include:
- Sales tax is paid up front on vehicle cost when you purchase versus pay as you go on lease payment only.
- Purchase option at end of lease lowers the monthly payment in a lease scenario. The intent is lower payments, not building equity. This is how you can operate more leased vehicles for the same cost as operating far fewer financed vehicles.
- Always compare identical finance and lease terms when comparing payments.
Cost is half the picture and tax is the other half. Looking at both halves is absolutely critical to a valid lease versus buy. Tax includes income, sales, capital gains, and property taxes. The best lease versus buy includes a comparison of both cash and tax for the buy versus lease scenarios.
- In forty-three states, sales tax is paid only on the portion of the vehicle used. The residual value is not taxed resulting in a significant sales tax savings. Take an $80,000 truck with a $30,000 residual value. Your firm saves sales tax on $30,000. It’s only paid IF you decide to extend the lease or buyout the lease.
- Operating leases are expensed 100% as incurred. Purchases are capitalized and depreciated for tax purposes.
- Depreciation can be limited due to “luxury auto limits” per IRS Publication 463.
- Bonus depreciation and section 179 rules change annually and in many cases are determined late in the year and apply retroactively making it difficult to plan.
- Leases for business vehicles are normally 100% expensed
Tax rules are complex and changing but are an important part of your lease versus buys analysis. Consult your tax advisor to determine which rules apply to your situation as it varies. Be sure they know the type of lease you are looking at – open-end (TRAC) or closed-end (consumer).
Opportunity costs aren’t a direct part of your cost analysis but should certainly be considered.
- Leasing allows for predictable cash flow as you do not pay large sums up front for the purchase, typically no down payment and in forty-three states sales tax is paid over time.
- Leasing can result in cash flow savings. Use the cash flow savings for the most important business priorities including putting more vehicles on the road
- In many industries, the number of vehicles is the driver of sales volume.
- Put forty vehicles on the road where you could only afford twenty-five under a purchase scenario.
- Preserve your credit line for business growth activities. Don’t use your line of credit to finance your vehicles. Use it for activities that will grow your company. Protect yourself from a potential downturn where you could use the extra breathing room. Ex. The downturn of 2008 when banks decreased risk by reducing credit lines when business receivables spiked and the need for credit increased.
While cost is certainly a part of the lease versus buy analysis, it is not the only factor, nor the most important. Cash and tax together must be analyzed thoroughly. Other factors should be considered and tied back to your strategic goals and objectives. If you are conducting a lease versus buy analysis for your organization, begin with answering the question, what are the goals and how does this help us meet those goals?Present your analysis based on cost, cash flow, tax and financial statement impact. Don’t forget to include opportunity costs as a final important consideration.
Now that you have a complete lease versus buy model, read more about Fleet Management and Fleet Wellness!