If you need a car to operate your business, which is better to purchase a vehicle or lease one?

On the one hand, if your business owns the car you’ll have a long-term asset and may qualify for more tax deductions. On the other hand, buying a car is a huge expense and monthly lease payments tend to be lower than car loan payments; they will also be tax deductible. In either case you will need to consider whether Fringe Benefit Tax applies.

Why buy a company car?

The major benefit to purchasing a car is that it becomes a company asset that offers a number of perks for business owners:

  • You can write off your petrol, general running and maintenance expenses
  • Your interest payments on a car loan and depreciation costs are tax deductible

The big con for many business owners is that buying a car is a major expense—one that may require you to finance a depreciating asset, or could be a drain on cashflow. You will, however, maintain the residual value on your investment as you pay it off, and once you own the car you can use it for as long as it can do its job.

The pros and cons of leasing

For many small business owners, leasing a company car is the more attractive option. Particularly when considering cash flow implications. Typically, it comes down to cost and cash flow. When you lease a vehicle you don’t have to come up with the cash for the purchase price —and monthly lease payments tend to be lower than car payments.

The flip side, however, is that leasing tends to cost more in the end—and those affordable monthly payments won’t add up to an asset for your business. Another point to keep in mind is your insurance requirements may be different and amount to higher fees.

Also be aware of the maximum number of kilometers stipulated in your lease agreement—if you exceed the limit it can also mean additional fees at the end of your payment term.

If you’ll be putting a lot of miles on a car, leasing allows you to upgrade to a new car on a regular basis – and doing so may allow you to dodge costly repairs on an aging vehicle.

As a final note on the “plus” side, just like business owners who purchase their company vehicle, those who lease can write off some of their business-related car expenses.

Final considerations

Before you commit to buying or leasing a company vehicle, do a cost-benefit analysis. Take note of the car’s total cost over the car loan or lease term including:

  • Monthly payments, including interest
  • Anticipated mileage
  • Maintenance, fuel, insurance, parking and other related costs
  • The value of the car at the end of the lease vs. the ownership period.

Talk to your accountant about which expenses you can claim on your income tax and GST, whether you choose to lease or buy.

At the same time you may want to seek advice on how to track your company car costs accurately and efficiently. Keeping good records is a must to make sure you don’t miss any eligible deductions for your company car—and so everything is in order if the IRD ever comes for an audit.