Types of Car Leases: Open or Closed Car Lease
A car lease works the same way for business or personal use, but business owners have other considerations, including deductions for car expenses. One of those considerations is what kind of car lease.
Ready to lease a car for your business? What Kind of Lease?
An open lease contract is used primarily for commercial (business) vehicle leases. In this type of lease, the lessee pays the difference between the residual value (estimated resale value) and the actual resale value at the end of the lease.
If the vehicle is driven more than estimated, the actual resale can be low, resulting in increased costs for the lessee.
In contrast, at the end of a closed lease, the lessee pays only extra mileage and extraordinary damages.
If you are considering embarking on a business car lease, here are some factors you need to know about:
The total cost of the lease depends to a large degree on residual value—the value of the car at the end of the lease. The higher the residual value, the lower the price of the lease. Since the residual value represents depreciation, look at it this way: the smaller the depreciation, the less the lease costs. Residual value is calculated as a percentage of MSRP (manufacturer's suggested retail price), so be sure to ask the dealer about this figure.
Open vs. Closed Lease
An open lease contract may be better from a tax deduction standpoint than a closed lease, because in an open lease, you pay all the expenses, which are tax deductible.
You don't have any of these expenses to deduct in a closed lease.
Lease Term Length
Shorter term leases are more costly than long-term leases, because the residual value goes down faster in the first 24 months. This makes sense, since any vehicle depreciates faster at the beginning than later in its life.
Lease terms are usually for 24, 36, or 48 months. Look at the "bumper-to-bumper" warranty on the vehicle and don't extend the lease past this date. In some cases you can get out of a car lease.
Before you go into a lease, you will need an estimated annual mileage for your use of the car. A typical lease might have a 12,000 mile annual limit, but if you think you will be running at more than 12,000 miles a year, it's worth it to pay extra for the additional mileage. Otherwise, you will have to pay for the additional mileage used at the end of the lease.
You can't get out of paying state sales taxes on a lease, so keeping the price low will help you pay less on sales tax.
Fees and Payments
Dealers like to add on fees, like an acquisition fee (which is comparable to points on a mortgage). Try to negotiate these fees out or down; they are just extra dealer charges, often hidden. The dealer may also require an advance payment (sounds like a deposit or down payment, doesn't it?).
The depreciation you can deduct on a car lease depends on the size and type of car. You may be eligible for special depreciation such as increased Section 179 limits, so check with your tax adviser before you lease.
Remember that everything is negotiable, and all lease terms can be negotiated to get you a better deal.