Understanding whether you should buy or lease a vehicle for your restaurant group requires understanding the financial fundamentals of leasing versus buying.
Put simply, a lease is the financing of a vehicle’s depreciation during the period you use it.
For example, if you lease a $65k delivery van for three years, and the delivery van is worth $20k at the end of those three years, a lease is simply the financing of the $40k plus sales tax on the $40k. In a purchase, you would finance and pay sales tax on the $65k purchase price and own a $20k vehicle after three years.
If it sounds like a lease and purchase are nearly identical from a financial perspective, assuming you’re financing, it’s because they are. However, the tax consequences of leasing versus buying slightly alter the financial implications.
In this article, we’ll illustrate the economic consequences of leasing versus buying while considering tax implications so you can determine whether buying or leasing is right for you.
By the end of the article, you will learn that leasing versus buying has similar financial consequences, and therefore, your focus should be on assessing the non-financial attributes of this decision. This includes determining whether a mileage limitation works for you, how you want to deal with maintenance, whether you plan to keep the vehicle longer than the lease period, and whether you wish to be stuck with the responsibility of selling the vehicle.
Buying vs. Leasing Tax Implications
Before we assess the financial implications of buying versus leasing, let’s illustrate how each impacts the taxes.
Buying a car allows you to deduct the following related to the purchase:
- Interest expense on the loan
- Taxes
- Insurance
- Gas
- Parking
- Depreciation, including Bonus Depreciation and Section 179 deduction
Leasing a car allows you to deduct the following related to the lease:
- Lease payments (adjusted for the annual lease inclusion)
- Insurance
- Gas
- Parking
Whether you buy or lease, commuting is a personal use of the vehicle’s time and will affect your tax deductions. For example, suppose you purchase a pick-up truck for catering deliveries and use the same truck to drive to the restaurant back and forth from home. In that case, the mileage attributable to driving back and forth from home is considered personal use. To keep things simple, we will assume the vehicle is being used 100% for business.
With that said, let’s discuss how depreciation works for a vehicle purchase.
Depreciating a Business Vehicle Purchase
A business vehicle purchase price is depreciated and deducted for taxes on the following schedule:
Year 1 = 20%
Year 2 = 32%
Year 3 = 19.20%
Year 4 = 11.52%
Year 5 = 11.52%
Year 6 = 5.76%
Bonus Depreciation, an accelerated tax depreciation program for certain assets, may be claimed depending on the most recent tax laws. Below is the most recent schedule:
2022 – 100%
2023 – 80%
2024 – 60%
2025 – 40%
2026 – 20%
After 2026 – 0%
After taking the bonus and regular depreciation into consideration, the following annual depreciation deduction limits apply for passenger automobiles as of 2024 (aka the luxury auto limits):
Year 1 – $20,400
Year 2 – $19,800
Year 3 – $11,900
Each succeeding year – $7,160
These limits ensure business owners aren’t abusing tax depreciation deductions by purchasing luxury automobiles. However, the passenger automobile depreciation deduction limits don’t apply for vehicles that weigh between 6,000 and 14,000 lbs., which covers most trucks and SUVs.
This is known as the Hummer tax loophole and was used pre-2023 by many businesses to write off the total purchase price of pick-up trucks and SUVs with a gross vehicle weight (GVW) greater than 6,000 lbs. using 100% bonus depreciation.
If you choose to forgo bonus depreciation or it’s no longer available due to the above phaseout, you can claim up to $25k of Sec 179 deduction for vehicles between 6,000 and 14,000 lbs. in the year placed in service. Trucks weighing more than 14,000 lbs. have no limit on the Section 179 deduction. However, section 179 is limited to your taxable income. Therefore, if you’re experiencing a tax loss, you will not immediately receive the benefit of the Section 179 deduction.
Section 179 and bonus depreciation are unrecognized in most states; therefore, these deductions only apply to federal income taxes.
It’s also important to remember that the NOL and Excess Business Loss Limitations may limit the amount of tax deductions you can use. Still, for the sake of this article, we’re going to assume that the taxpayer is not in a tax loss position.
Finally, depreciation deductions must be recaptured as income when sold if the car didn’t depreciate that amount. For example, if you deduct the entire $65k purchase price in year 1 using bonus depreciation and later sell it in year 3 for $40k, the entire $40k must be reported as taxable gain.
Annual Lease Inclusion
To even the playing field between a purchase and a lease, the IRS limits how much you can deduct for lease payments for a passenger automobile weighing less than 6000 lbs. A lessee must reduce its lease payment tax deduction by adding a lease inclusion amount to gross taxable income. The lease inclusion amount reduces the lessee’s lease payment tax deduction by about the same amount as the luxury car and business use limits, which would have reduced the owner’s tax depreciation deductions if they purchased.
The lease inclusion amount depends on the fair market value and lease year of the car. For example, a $70,000 car leased in 2024 requires the following additions to taxable income each year of the lease:
Year 1 – $62
Year 2 – $138
Year 3 – $204
Year 4 – $245
Year 5 – $281
These amounts are prorated for any portion of the year the car is not leased.
Financial Implications of Leasing vs Buying
Now that we have laid the primer, we will show you the real-life impact of leasing vs buying on your cash flow.
In the illustrations below, we have compared the financial implications of leasing vs buying a delivery van with a gross vehicle weight (GVW) of 8,000 lbs. using four scenarios. Each scenario assumes the van is placed in service in a different year with no down payment on the purchase.
There are two exhibits. Exhibit A compares a three-year lease to a purchase on a three-year note followed by a sale after three years. Exhibit B compares two three-year leases to a purchase on a six-year note followed by a sale after six years.
[EXHIBIT A: BUYING VS LEASING A CAR FOR YOUR RESTAURANT GROUP]
Exhibit A illustrates that purchasing a 6000 lb.+ vehicle for your restaurant group is more advantageous than leasing when bonus depreciation is 60% or higher. However, leasing becomes the better option as the bonus depreciation phases out.
Remember that when purchasing and selling a car after three years, you’re tying up more cash due to your down payment or higher loan payments.
Although we considered this by factoring in the time value of money in our calculation, you may have a higher opportunity cost for this cash than the 6% factor we used. Maybe you can use the additional funds to buy other equipment for your commissary, which will have a 20-30% return on investment instead of a 6% rate of return used to discount future cash flows.
[EXHIBIT B: BUYING VS LEASING A CAR FOR YOUR RESTAURANT GROUP]
As you can see in Exhibit B, purchasing a 6000 lb. + vehicle for your restaurant group is significantly more advantageous in all four scenarios, mainly because the $65k car is being used over 6 years while in the lease after three years, you’re going to have a brand new $65k car.
Here’s the surplus in cash flow for a $65k vehicle over 6 years due to buying versus leasing depending on the amount of available bonus depreciation in the placed-in-service year:
- 100% Bonus Depreciation = $21,383
- 80% Bonus Depreciation = $20,919
- 60% Bonus Depreciation = $20,455
- 40% Bonus Depreciation = $19,991
Is the $20-21k savings over 6 years worth driving a vehicle that is not the latest and newest model after three years? That’s the question you’ll need to answer when deciding whether to buy or lease.
In conclusion, it’s more beneficial to purchase a vehicle if you plan on keeping it for more than three years, need more than 10-15,000+ miles per year, and don’t need to drive the newest model. Otherwise, the financial implications for leasing and buying are nearly identical, and non-financial implications, such as limited mileage, should be considered more heavily.
Other Considerations when Acquiring a Company Vehicle
Capitalized Lease
A capitalized lease is considered a purchase for tax and accounting purposes. A capitalized lease may be applicable if the following conditions are present:
- Portions of the lease payments give the lessee equity
- The title passes to the lessee once the lessee makes the required lease payments.
- The lessee’s payments for a relatively short period of use equal a large portion of the purchase price.
- The agreed lease payments materially exceed the current fair rental value, which may indicate that the payments include an element other than compensation for using the property.
- A purchase option allows the lessee to acquire the property at a price nominal to the property’s value when the option may be exercised or is a relatively small amount compared with the total required payments.
- A portion of the periodic payments is designated explicitly as interest or recognizable as the equivalent.
It’s important to understand that a capitalized lease is a purchase for accounting and tax purposes. Don’t fall into the trap of thinking you can structure a lease like a purchase and treat it like a lease for accounting and tax purposes.
Mileage Deduction
A simple alternative to deducting actual expenses (lease payments for a lease or expenses related to purchasing a car, such as depreciation, interest, insurance, etc.) is to reimburse owners and employees based on a fixed mileage rate.
The mileage deduction requires the employee or owner of the business to submit an expense report documenting how many miles they have driven for business purposes. They receive a reimbursement at a fixed rate determined by the IRS (67 cents per mile in 2024) for each mile driven. The business gets a deduction for the reimbursement, while the employee doesn’t claim it as income.
A mileage log must be maintained that proves each trip’s destination, distance, and purpose. The person claiming the deduction can own or lease the vehicle. When claiming the mileage deduction, you’re unable to deduct the interest, taxes, and depreciation of the car used to claim the mileage deduction.
The mileage deduction is commonly used to reimburse employees for business miles driven using their vehicles.
Conclusion
The analysis above shows that leasing and buying a vehicle have similar financial consequences, and non-financial considerations should be weighed more closely when deciding.
As bonus depreciation phases out over the next few years, and the NOL and Excess Business Loss Limitations kick in, the tax benefits from buying will become less relevant, and the higher monthly payments due to purchasing may no longer benefit you.
