Operating a business involves navigating complex challenges, one of which can be leasing a company car.
Business car leasing offers several benefits, such as potential tax deductions and reduced upfront costs. This guide answers some of the most common questions related to leasing a car through a business.
Benefits of Leasing a Car for Your Business
- Tax Benefits and Deductions: By leasing a car, you can deduct the payments, interest, tax, upkeep, and maintenance expenses involved in the lease from your taxable income.
- Lower Upfront Costs: Compared to buying a vehicle, leasing requires only the first month’s lease payment and any applicable fees or deposits upfront.
- Access to Newer Vehicles: Leasing gives you the opportunity to upgrade your fleet regularly, ensuring access to the latest features and technologies.
- Flexible Lease Terms: Leasing allows you to customize the lease term length, mileage limits, and maintenance and repair options based on your business needs.
Steps For Leasing A Car Through A Business:
Business Car Lease Requirements
Leasing a car through a business requires certain prerequisites. Apart from a good business credit score, leasing companies might ask for:
- Proof of your business entity: An Employer Identification Number (EIN), articles of incorporation, or partnership agreement.
- Financial statements: These should include a balance sheet and income statement to demonstrate the financial health of your business.
- Bank statements: These can provide further evidence of your company’s financial stability.
- Insurance: You must provide proof of adequate auto insurance coverage.
Leasing a Car Through Your S Corp?
Yes, S Corporations can lease a car and benefit from the tax advantages. With an S Corp, the lease payments become an operating expense that can offset income and thus, lower the company’s overall tax burden. Remember that the vehicle should be primarily used for business purposes. In cases where the vehicle is also used for personal purposes, only the percentage of use attributable to the business can be deducted as an expense.
Leasing a Car Through Your LLC?
Yes, an LLC can lease a car for business purposes. In fact, it’s a popular choice among business owners because it keeps personal and business liabilities separate. The LLC becomes the lessee in the contract, and the car becomes an asset of the LLC. Similar to the S Corp, the LLC can deduct the business portion of the lease payments as a business expense.
Writing Off a Car Lease Through an LLC
If your LLC leases a car that’s used for business purposes, you can write off the business-use portion of the lease payments as a business expense.
But remember, only the portion of the lease payments corresponding to the business use of the car can be written off.
For instance, if the vehicle is used 70% for business and 30% for personal use, only 70% of the lease payment can be deducted. Therefore, accurate tracking and documentation of the car’s usage are essential for proper write-offs.
Consulting a tax professional or advisor can provide tailored guidance for your business circumstances.
Business Car Lease No Personal Guarantee
Obtaining a business car lease without a personal guarantee can be challenging, especially for startups and small businesses. Typically, a personal guarantee is required when the business itself doesn’t have a sufficient credit history or assets to secure the lease.
However, established businesses with strong financials and excellent credit history may have the leverage to negotiate a car lease agreement without a personal guarantee.
Additionally, you might get a more favorable credit assessment if you can offer a higher down payment or choose to take over someone’s lease.
Taking over a lease is generally less scrutinized by lenders because you are usually obtaining the lease from someone who could be on the verge of defaulting on their payments.
What is the actual expense method for writing off a leased vehicle?
The actual expense method allows businesses to write off the exact costs associated with the vehicle. These costs can include the actual lease payments, sales tax, repair and maintenance costs, and even insurance payments.
What is the standard mileage method for writing off a leased vehicle?
The standard mileage method is a simpler approach where businesses can write off mileage instead of actual expenses. The IRS sets a standard mileage rate each year, and businesses can deduct this rate for every mile the vehicle is driven for business purposes.
Can I switch between the actual expense method and the standard mileage method?
No, businesses can choose only one method to write off a leased vehicle. It’s advisable to calculate both methods during tax time to see which one allows for the biggest tax write-off.
How do I build business credit for leasing a vehicle?
Building business credit involves several steps, including incorporating the business, getting an Employer Identification Number (EIN), setting up a business phone number and bank account, registering with Dun & Bradstreet to get a DUNS number, and establishing trade lines with vendors who report to your business credit.
What type of insurance do I need for a business-leased vehicle?
If the car will primarily be used for business, you will want commercial insurance. If the car is mostly used personally and sometimes for the business, then you may be able to get away with personal insurance.
To wrap it all up, understanding the ins and outs of business car leasing can significantly impact your enterprise’s mobility and bottom line. From S Corporations to LLCs, the process opens up opportunities for lower upfront costs, access to the latest vehicles, tax benefits, and customizability of lease terms.