Automobile
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Joining a new firm comes with many perks. Some offer great health benefits, while others have solid PTOs. Another common perk offered by a few firms is providing company cars to a couple of their (mostly senior-level) employees.
To provide their employees with a mode of transportation, firms have the choice to either lease or purchase company cars. What is the right choice?
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Discover the reasons for a business to either lease or buy company cars.
The choice to lease or purchase company cars has severe financial impact in the form of tax implications, cash flow, and more.
Leasing Company Cars
Leasing a car is the ideal strategy that allows the firm to utilize a vehicle for a specified time duration (2–4 years).
During this period, the business continues to make monthly payments to maintain temporary ownership of the car.
This ownership model presents certain advantages:
- Lower Initial Costs: There are lower upfront costs associated with leasing company cars. This helps maintain cash flow, which allows a firm to allocate resources towards other projects.
- Access to Latest Models: By leasing, firms can get their hands on the latest car models featuring new technology. This improves employee satisfaction.
- Tax Benefits: Monthly lease payments can often be written off as a business expense, which can provide tax benefits to firms.
However, leasing might lead to significant long-term costs. This becomes the case if the vehicles are kept for longer periods, where buying might be a better option.
Along with this, many car vendors often impose mileage restrictions with leases.
Purchasing Company Cars
A firm can gain full ownership of the vehicle by buying the car outright. This option involves shelling out a larger amount, but it does come with certain advantages. They are:
- Direct Ownership of the Vehicle: After a firm has purchased the vehicle, the firm holds full ownership. This allows for higher flexibility in usage. Without incurring extra costs, firms can use the vehicle as per their convenience.
- No Restriction in Use: Firms having ownership have no mileage restriction; perfect for business that requires long-distance travel. Additionally, a business can modify the company cars with their own branding and equipment.
- Tax Benefits: Company cars owned by firms can be depreciated over time. This creates significant tax savings by allowing a firm to deduct a portion of the vehicle cost from their taxable income.
But purchasing the entire car has certain drawbacks as well. Particularly, the high initial investment cost is particularly challenging for small businesses. Additionally, at the end of the day, a car is a depreciating asset.
Conclusion
In a nutshell, making the choice between leasing and purchasing company cars depends on the firm’s short-term and long-term needs, financial situation, and travel requirements.
