Consumer Questions: I’m Considering Leasing a Car through my Business
- May 20, 2021
- Uncategorized
- Posted by mangoboss
- Leave your thoughts
You’ve decided to become self-employed and driving a vehicle or driving clients is now a part of your business requirements. You might be asking yourself whether or not leasing a car through my business is a good option for you.
Deciding whether to lease or buy your vehicle can be a little complicated but we at Drive Mango are here to bring you some clarity when making this decision.
Leasing may be a better option for you and your business If you:
- Prefer to drive a new car every 2-5 years
- Drive an average predictable amount of kilometers every year
- Maintain your car well
- Have good credit history
Financing may be a better option for you and your business If you want to:
- Have the vehicle’s ownership in your name
- Eventually pay off your car and be payment free
- Drive as many kilometers as you please
- Customize your vehicle
The first step is to determine what percentage the vehicle is being used for business purposes to generate income. If you use the vehicle 75% of the time to generate income for your business or fulfill business duties, you are only eligible to claim 75% of the vehicle costs.
When it comes to expenses like gas, maintenance, insurance, parking, registration fees, lease, loan interest, etc, you can deduct your business usage percentage.
If you are eligible to deduct your vehicle expenses from your business, the amount available to deduct ends up being roughly the same amount over a period of time when leasing vs buying your vehicle.
Taxes and Leasing:
With a car leased for business use, you can deduct up to $800/month plus HST which means you’re capped at $9,600 in tax-deductible expenses annually.
It is not recommended to make a large down payment for your lease as you may not be able to deduct the full amount within the first year. The down payment would be viewed as a periodic expense over the term of the lease.
Here is a typical lease payment breakdown to help figure out if leasing a car through your business makes sense for you.
Lease Payment: $400/mo = $4,800/year
Gas: $40/week = $2,080/year
Insurance: $190/month = $2,280/year
Business Usage Percentage: 80%
Annual Deductible Amount: ($9,160 x 80%) = $7,328
Keep in mind that the CRA tax rule limits the depreciation when dealing with “luxury cars”. This rule also limits lease payments on luxury cars to a very small degree.
Taxes and Financing:
When you decide to finance a vehicle, the tax claims are different when compared to leasing a car for business use. The tax deductions depend on how much you paid when purchasing, whether or not the car was paid for in full, and whether or not you decided to finance the vehicle purchase.
If you decide to purchase the vehicle in full, the whole amount paid up front can’t be claimed, the cost would be spread over the “useful” life of the vehicle.
It is important to note that the other expenses associated with owning the vehicle such as gas, insurance, maintenance, etc, can also be deducted at your calculated Business Usage Percentage.
The amount you can claim is based on the CRA’s depreciation model; “Capital Cost Allowance” (CCA). There are various CCA classes depending on vehicle type. In most cases, passenger vehicles that cost $30,000 or less before taxes usually fall into Class 10.
The tax deductible limit for a purchased/financed vehicle is $30,000. Keep in mind that you cannot deduct the full amount right away, it must be depreciated at 30% on an annual declining balance.
Additionally, you can only deduct 50% of the depreciation within the year of purchase, this is known as the “half year rule”. You can continue to claim these tax benefits until you have claimed a total of $30,000.
Lastly, you are entitled to claim the interest paid on your auto-loan, this amount is capped at $300/month.
For example, If you purchase a car for $30,000 before taxes and use that vehicle 80% of the time for business purposes, you will use the CRA’s “class 10” model to depreciate 30% and calculate your tax claims:
Cost of vehicle before taxes: $30,000
Year 1 Deduction (half year rule): ($30,000 x 50% x 30%) = $4,500
Year 1 Claimable amount: ($4,500 x 80%) = $3,600
Year 2 Undepreciated Balance: $25,500
Year 2 Deduction: ($25,500 x 30%) = $7,650
Year 2 Claimable amount: ($7,650 x 80%) = $6,120
Year 3 Undepreciated Balance: $17,850
Year 3 Deduction: ($17,850 x 30%) = $5,355
Year 3 Claimable amount: ($5,355 x 80%) = $4,284
With the example of a $30,000 vehicle financed over a 5 year term at a rate of 4.99% interest with no down payment, the total interest to be paid over the duration of the loan is roughly $4,435. The approx monthly amount paid towards loan-interest for this example is as follows:
Month 1: $140
Month 2: $138
Month 3: $136
Month 4: $134
Month 5: $132
Month 6: $129
Month 7: $127
Month 8: $125
Month 9: $123
Month 10: $121
Month 11: $119
Month 12: $117
Total interest paid in Year 1 = $1,541
This amount does not exceed $300/month ($3,600/year) and is claimable.
The Verdict?
There is no right answer when asking yourself if you should lease or finance a vehicle for business purposes, each situation and business is unique in their own ways.
For some businesses, it may be beneficial to own a vehicle long-term to own it as an asset. This gives the freedom to do anything with the vehicle including modifications, selling it, or transferring ownership. Financially, it is possible to claim the deductible amount over time so it really depends on cash flow available.
In other cases, leasing is a better option. Not taking full ownership and having the freedom to switch out cars provides more flexibility for businesses with changing requirements. The ability to claim a steady amount per month allows for predictability when organizing finances for your business.
Looking for a vehicle to Lease for your Business?
At Drive Mango we can help you look for a vehicle for your business and provide financing that fits your needs. Our team works hand-in-hand with dealerships and lenders alike to provide manageable financing and subprime for those who need it.
Our Simple Process is simple:
- Fill out our Survey
- Get Approved
- Pick your next car
- Take delivery of your new Vehicle
We understand the stresses involved when deciding to acquire a vehicle for your business. We at Drive Mango want to make finding your next car and the decisions involved as easy as possible. Get fully informed so you can make the right decisions, let us help.
