Leasing a car for business is never a bad idea. Moreover, most businesses use this exact method to be able to use a car for their business activities in the absence of the required amount needed to buy a vehicle until the time agreed upon elapses or expires.
Leasing a car for business is one way of acquiring a vehicle for business purposes even without having full ownership of the vehicle.
Here, in this article, we shall be dealing with several different aspects involved in leasing a car most especially for the purpose of business. We will also be considering in detail what car leasing for business is all about and the pros and cons involved in it.
What Is Car Leasing?
In a nutshell, car leasing provides so many businesses with the opportunity of acquiring or making use of a new car.
Once the lease contract binding the car ends or expires, the business will no longer own the car or be able to use it afterward unless the contract for the lease provides chances for the business to own the car from the dealer). It should also be known that a car leased out is temporarily owned by the leases.
Now, the main reason behind leasing a car for the purpose of business is to own a car, most times a new one and not just any type of vehicle but that doesn’t mean that the business owns the car as a matter of fact the vehicle still remains a rented asset.
The business, therefore, uses the vehicle for a short period of time before returning the leased vehicle to the owner or dealer.
The business can also decide to take full ownership of the vehicle after the lease act contract has expired. In other words, leasing a car or car leasing is a type of car auto financing whereby one gets to hire or rent a car for a specific purpose like in this case, for business uses.
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Hire Purchasing Vs Car Leasing
In the past, in order to own an asset a person must be ready to purchase it from the seller all at once by paying for the cost of the asset at a spot but in recent times people or businesses don’t necessarily need to pay in total the cost of acquiring or owning an asset all at once.
Payment can be made either periodically or installmentally and still ownership can be transferred with ease. Hire purchasing simply involves a deal in which a party acquires an asset from a dealer and is expected to remit a fixed pay installmentally.
This type of purchasing is sometimes used in small businesses to acquire assets used in pursuing business functions before having the supposed amount to totally own the asset at once.
The business goes into agreement with the dealer of the assets and signs a contract to make use of an asset, let’s say for example, a car for a fixed period of time and then it is expected to pay up for the use of the asset instalmentally either weekly, monthly or annually (yearly).
This process is what is known as ‘Hire purchasing ‘. Whereas leasing, simply involves a deal whereby a lessor rents out his asset for example, a car to the lessee in exchange of a systematic payment usually done periodically.
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Differences Between Car Leasing And Hire Purchasing
Below are some of the differences listed between car leasing and hire purchasing.
- In hire purchasing, down payment is mostly required whereas in car leasing, it is optional or in most cases not necessary to make a down payment. (Note; Down payment means the initial or the first payment made to hire an asset by a hirer to the dealer. It is usually what brings about the deal in the first place. With no advance pay, assets may not be released for hire purchasing. But in leasing such is not required.
- The time duration for leasing is usually longer than that of hire purchasing. Leasing may run from just some few months to several years and such assets fit for this includes land, building and machineries.
- In hire purchasing is expected to pay both the interest and the principal amount of the asset all added together whereas in leasing the lessee has to pay only the cost of using the assets alone.
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Pros And Cons Of Leasing A Car For Business
There are several advantages and disadvantages attached to leasing a car for business purposes and that is what we will be looking at in this phase.
Pros
Easily affordable
This is one of the valid reasons why most businesses consider leasing a car compared to buying a car for business uses. Car leasing is quite affordable compared to purchasing a brand new car by paying for its cost all at once in a spot.
In leasing, you don’t have to find it difficult to purchase a car since you are only expected to make payments periodically for a fixed period of time.
Cons
There is always a restriction
Every leased car always comes along with certain restrictions and one of them is not to exceed the limit point between 12,000 to 15,000 miles and once the agreement is broken or the limit is exceeded by the lessee. He gets charged with the mileage penalty.
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Differences Between Buying Vs Leasing A Car For Business
Most entrepreneurs and business owners may find owning a car a vital aspect of their business. Hence, the need to either buys a personal car for business purposes or they go for the second option which is leasing.
And it is clear that both options may be valid. Hence, we will be looking at the differences that exists between the two options.
In car leasing penalties for higher mileage than leasing terms are involved whereas in buying a car there are no penalties or limits.
In car leasing customization is not permitted whereas in buying a car the owner can decide whether or not to customize his vehicle.
Leasing a car usually involves a periodical payment on a monthly basis whereas buying a car doesn’t involve periodical payment.
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Leasing A Car For Business Tax Deduction
The cost of the vehicle is stored outside the balance sheet, freeing an important loan for other countries.
You can require 100% VAT on payments if vehicle is used solely for business purposes; this is reduced to 50% if used for personal travel
You can compensate up to 100% of the tax invoice, depending on the vehicle emissions, for vans it is 100% regardless of emissions.
Excess mileage and Maintenance Packages are a service meeting that you have the right to demand 100% VAT per 100% of the cost against your tax invoice
Conclusion
Car leasing is just one of the several ways a business can acquire a car for its business purpose. It involves purchasing a car and paying up periodically for the cost of the asset. The process enables businesses to own vehicles with less effort.
Various tax benefits are related to car rentals through your company; A wide range of cars and travel costs are subject to tax calculation. In addition, rent is usually cheaper than traditional car loans, and allows businesses to update your vehicles more often than it would be reasonable with vehicles purchased directly.
Leasing A Car For Business FAQs
What Is An Open End And A Closed-End Lease Contract?
In an open-end lease contract the lessee pays the difference between the estimated resale value and the actual resale value. Whereas, in a closed-end lease the lessee pays only extra mileage and extraordinary damages.
What Are The Benefits Of Car Leasing For Business?
There are some benefits of leasing a car for business and below is a list of them.
- It improves cash flow for the business.
- It avoids spending on depreciating vehicles.
- It improves safety for staff.
- It is often cheaper than personal leasing.
Is VAT Recoverable On A Leased Car?
The answer is yes, as long as you are VAT registered, then 100% of VAT is recoverable if the vehicle is mainly used for business only.
Who Can Take Out A Business Lease Deal?
There can be limits to who can take out a business lease contract and below are some of the eligible businesses that can get a business contract hire and they include.
- A limited company
- A partnership
- A limited liability partnership
- A sole trader (Sole proprietor)
- VAT registered business
