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.
If leasing a car through your business isn’t an option, consider reading our guide on how to buy a car through your business.
Key Takeaways on Leasing Cars Through Your Business
- Leasing a car for your business comes with potential benefits like lower monthly payments and regularly getting new vehicles
- To qualify for a leased business car, you’ll likely need to meet criteria regarding credit, income, insurance, and financial paperwork
- Open-end leases pose risks of owing additional fees if the car loses value by more than expected when returned
- Multiple factors impact the affordability of business car leases, including negotiated pricing, value estimates, and the effective interest rate
- New and smaller businesses may find it harder to qualify for commercial leasing programs due to less operational history
- Staying within mileage limits is critical for avoiding costly overage fees, and restrictions usually apply to modifying leased vehicles
- Claiming tax deductions on leased business cars involves complex rules around documenting percentages of personal versus business use
Table of Contents
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.
Other Costs and Considerations
Some other leasing costs and factors include:
- Capitalized cost – Essentially the lease price after negotiation
- Residual value – Car’s estimated worth at end, affects monthly payments
- Money factor – Lease interest rate, impacts overall lease expense
Steps For Leasing A Car Through A Business:
Additional Details on Lease Types
There are two main types of leases to consider – open and closed:
- Open leases: Commit to paying difference between residual value and actual resale value. Must cover excess mileage/damage. More common for businesses.
- Closed leases: Only pay for mileage beyond limit and damages. More common for personal leases.
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.
Special Factors for New/Small Businesses
Qualifying can be harder for newer and smaller businesses. Some requirements may include:
- Time in business – Some require minimum years in operations
- Startup financial documentation – Early stage businesses may need to provide more details
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.
Another article you might find helpful is 14 Essential Questions to Ask Before Leasing a Car.
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.
Additional Tax Benefits and Rules
Other tax implications with leasing include:
- Depreciation deductions – May provide additional tax deductions
- Documentation needs – Careful tracking required for personal vs. business use
- Compliance complexity – Many IRS rules govern vehicle lease deductions
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.
Frequently Asked Questions
Q: What credit score is needed to lease a car for business?
A: Most leasing companies require a minimum business credit score of 700, but some may approve scores in the 600s depending factors like down payment.
Q: Can I negotiate the residual value or interest rates on a business car lease?
A: Yes, you can certainly negotiate key lease terms like capitalized cost, residual value, and interest rates as you would a normal auto purchase loan.
Q: How do closed leases charge for excess mileage?
A: Closed leases typically charge between $0.10-0.25 per mile if you drive over the allotted mileage limit during your lease term.
Q: Do leased cars have mileage limits for business use?
A: Yes the contract will specify an annual mileage limit, often 10k-15k miles. Anything over would incur overage fees.
Conclusion
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.
