If a new vehicle "purchase" is going to be more than 34k before taxes, then to get the most tax savings over the lifetime of the vehicle it is best to lease (up to $900 before taxes per month) the vehicle until the residual is at or or just below the 34K mark.
At that point you can decide if you want to keep it and purchase it or finance it from that point and then we depreciate the remaining value of the vehicle over the rest of its lifetime. Or just rinse and repeat, turn in the old lease and sign up for a new one.
In a 2 or more vehicle family, I like to advise that 100% of all the costs associated with the leased vehicle should go into the business. This includes your Lease pmt, insurance, gas, maintenance ect. Keep in mind that this is not golden for every person’s situation and you should always check with your tax professional to see what is the best treatment for your particular situation
If the new vehicle "purchase" is going to cost less than 34K before taxes, then over the lifetime of the vehicle the tax savings of buying vs leasing are basically the same. The purchase sees more upfront tax savings vs a smaller upfront tax savings with a lease, but the lease provides more consistent tax savings year after year in subsequent tax years.
Tax professionals can help you determine what the best treatment is for your specific situation, as every situation is different. A buy versus lease scenario is basically the same if you purchase a vehicle, whether you finance it or buy it outright, for less than $34,000, then over the lifetime of that vehicle, the tax savings are basically the same. Purchases provide a little bit more tax savings upfront compared to leases, but leases provide more consistent tax savings year after year.
As an example, Claire wants to buy a $30,000 car, and if she buys it outright or finances it, she would save $450 on taxes in her first year, $765 in her second year, and just under $2,400 after five years.
Claire's lease payment on that same $30,000 car would be about $375 a month, so she'd save about $2,250 in taxes over five years. If the vehicle's worth less than $34,000, there's a $130 difference in tax savings between buying and leasing, so pretty minor.
On the other hand if Claire purchased a $60,000 vehicle, she would save the same in taxes as purchasing a 30,000 vehicle - about $2,400 in taxes. CRA caps the cost amount of the vehicle that you can depreciate, so the excess of the price above $34,000 is forever lost.
If Claire were to lease the $60,000 vehicle, her lease payment would be about $630 per month, and that would save her about $760 in taxes each year of the lease, or about $3800 over the course of 5 years. Therefore, Claire would save just about $3,800 in taxes versus $2,380. A much better result, no?
In the case of buy versus lease, the first thing you need to ask is, what is the purchase price of the vehicle if it's less than $34,000?
Do what works for your budget and finances, buy versus lease.
The vehicle you want to purchase should always be leased until the residual is reduced. If you decide you like it, have not been in an accident you can then finance the rest to get all the tax savings or if you don't want to keep it, you don't need to purchase it. You can rinse and repeat on the lease.
Comments