Reasons to Buy or Lease an Automobile

Buy:

•    Taxpayers who own autos can choose the standard mileage rate in the first year an auto is placed in service and switch to the actual expense method in a later year if it becomes more favorable. Taxpayers who lease may also choose the standard mileage rate in the first year, but must use it for the life of the lease.
•    A taxpayer intends to keep the vehicle more than four years, or until it is ready for the junkyard.
•    The vehicle will be driven more than 10,000 – 12,000 miles per year. Many lease contracts have a mileage limit with an additional charge for every excess mile.
•    The taxpayer has cash for the purchase or down payment.

 

Lease:

•    Lower monthly payments and little or no money down. This leaves a business owner with more cash to invest in business. Monthly lease payments usually average about one-third less than loan payments on a comparable vehicle.
•    Leasing is suited to taxpayers who desire a new car every few years and who would borrow to pay for a new car.
•    Off-balance-sheet financing.
•    Cost of interest is included in lease payments (100% deductible). Interest is not deductible for employees who purchase their vehicles.
•    When it is time for a new car, there are no worries about disposing of the old one.

Contracts, TermsLease Agreement Negotiation

•    Read the lease contract carefully to avoid hidden costs and penalty situations. Charges for excess mileage, wear and termination fees may be negotiable. Make certain the lease may be terminated early, and what penalty may be involved, if any.
•    Get a closed-end lease that establishes the vehicle’s value at the end of the lease. Open-end leases leave the value to be determined and hold the lessee responsible for any shortfall.
•    Identify additional charges if vehicle is turned in early.
•    Negotiate the purchase price (capitalized cost) that leasing companies use to calculate lease payments. The capitalized cost should be lower than the auto’s sticker price and closer to the dealer’s invoice price.
•    Monthly lease payments are based on the auto’s capitalized cost plus finance charges less residual value.
•    Purchase options at the end of the lease need to be written into the contract up front.
•    Verify the “rate” or “money factor” of the lease. The lower the rate the better. Most dealers do business with several finance companies and can shop around for the lowest rate.
•    Check for mileage limitations and extra costs for exceeding the mileage limitations.
•    Avoid “capitalized cost reduction,” which is a disguised downpayment. It is usually not required.
•    Acquire extra “gap” insurance to cover the immediate depreciation a vehicle suffers right off the lot. If the vehicle is stolen or totaled in the first few months, the insurance payoff will not cover the difference between the vehicle’s value and what the lessee owes.
•    Make sure the warranty covers the entire lease term.