Table of Contents
If you’re considering buying or leasing a vehicle for your business, you must understand how the ownership costs affect your taxes. The first step is determining whether you’d be better off leasing or buying. We’ll cover that in detail below, but first, let’s review some of the key factors involved in making this decision:
The business and its needs.
Before you decide on buying a vehicle for a small business, it’s important to consider your business needs. Is there a specific type of vehicle that will help grow your company? How many vehicles do you need, and what is their cost? Your budget and tax situation will also be critical in how much money you can spend on leasing versus buying a car for your small business.
If you have a small budget, leasing is a great way to get the vehicle you need without going into debt. When you lease a car, your monthly payments will be less than if you were to buy that same vehicle. This can help reduce the money that goes towards interest on loans or credit cards.
Should you lease or buy?
When you lease a vehicle, the payments are made by the leasing company to the bank or dealer. The customer is only responsible for regular payments on their monthly lease payment. When it comes time to trade in your leased vehicle, you do not have any equity and will be required to pay all fees associated with returning your vehicle (this includes any remaining payments).
If you buy your new car or truck outright instead of leasing it, you’ll be responsible for paying off the entire purchase price at once. This means that if something goes wrong with your car after purchasing it. You need repairs done before continuing to use it–or if there’s an accident–it could cost thousands more than just renting/leasing another one temporarily while waiting for repairs because now there’s no way around having them done immediately without spending even more money than necessary!
How does the cost of ownership affect your taxes?
The cost of ownership is not always deductible. You can only claim a portion of your lease payments as an expense if it’s for work-related purposes, such as:
- The vehicle is used for business purposes (e.g., transporting clients or employees)
- You’re self-employed and need a vehicle to conduct business activities, such as driving clients around town and meeting with suppliers.
If you’re running a small business, there are two ways that the cost of ownership affects your taxes: tax-deductible or tax-exempt.
Expense Documentation and Mileage Tracking
Documenting the prices and vehicle use is crucial whenever car expenses are claimed for tax purposes.
The CRA has very clear guidelines on what it may request as evidence of the costs and use of the vehicle. You can view the information needs here. The CRA website does a fantastic job of describing what information it requires.
Using a logbook for the concerned vehicle is one of the necessary pieces of documentation.
The following details should be recorded in a log book:
- The dates of all of your travels
- The location of the journey
- The objective of the journey
- The total kilometres travelled
Although it can be annoying, following these guidelines is crucial in case CRA requests further supporting information.
You can keep a physical logbook in the corporate car or utilize a mobile app to keep track of this information.
Timing is Everything
Timing is crucial in many situations in life. The same discount is available if you purchase a business car on December 31 of any given year instead of January 1.
When leasing an automobile, a contract signed earlier in the year would result in more months of payments being eligible and, thus, a bigger deduction for the year; conversely, a contract signed in December will result in no deduction since no payments have been paid on the lease for the year.
If you decide to buy the automobile rather than lease it, the disposition can be expensive. There could be a taxed gain or loss when you sell a company vehicle that you own. Ordinary income is the tax treatment for the share of any gain that results from depreciation. In contrast, when you return your leased car to the dealer, there is no taxable gain or loss.
You must understand how the ownership costs affect your taxes to get the best deal.
You need to know the costs of ownership. You must pay additional taxes and insurance fees if you’re leasing a vehicle. If buying a vehicle, these costs are included in your monthly payment and added to the price tag of your new ride.
The tax implications are another factor to consider when deciding whether to lease or buy your next automobile:
- When leasing an automobile, only 50% of its value is considered taxable income by CRA (Canada Revenue Agency). In contrast, when purchasing a car outright as opposed to financing it through an auto loans provider such as TD Auto Finance or Scotiabank Auto Finance (both global financial institutions), 100% of its value will be taxed at purchase time–and every year after that until it’s paid off!
- So if someone purchases $50K worth of cars over five years using cash instead of financing options like leases where only half would be considered taxable income under current law…they’ll end up paying less overall just because they didn’t use any financial assistance whatsoever.”
If you want to buy or lease a vehicle but want to spend less on taxes and insurance, leasing is the better option. With its low monthly payments, you’ll still get access to a nice car without losing all your hard-earned cash upfront.
The decision making process to lease or buy a vehicle is a complex one that can significantly impact your business. If you’re looking for help with this process, contact a reputable firm today! They can help you determine whether leasing or buying is right for you and what financing options are available.