How to Lease a Car Through Your Business

How to Lease a Car Through Your Business

How to Lease a Car Through Your Business

Leasing a car or truck under your business name, instead of through a personal credit profile, is gaining in popularity with entrepreneurs. 

Some business owners like the idea of having newer cars to drive to meetings and events or for other much-needed business purposes. Others don’t like putting so much wear and tear on their personal vehicles and have deemed the IRS’ standard mileage deduction to not be as rewarding as deducting straight expenses.

Still, others are hoping to expand a sales force or add more field reps and want to keep a consistently branded theme and record of reliability in their client dealings.

Whatever your reason for looking into a leased vehicle, it’s important to get the facts so that you don’t overpay, or – worse yet – get penalized for driving the vehicle in a way that’s counter to the lease agreement. Here are some basic steps to getting the new vehicle of your dreams at a price you can afford.

How Does Leasing a Car Through Your Business Work

If your business qualifies based on income, business credit, and other factors, it may be able to lease a car through the business. This may provide tax advantages, as well as protect the owner from personal liability that arises from use of the vehicle for business purposes. 

Here’s what you need to know.

Is a Car Lease the Right Decision for Your Small Business?

Leasing a vehicle provides a few distinct advantages over buying a vehicle. The main one is that monthly payments may be lower, and there may be a minimal down payment required. Routine maintenance costs may be covered during the lease. And there’s less of a commitment to a specific vehicle. When the lease ends you will likely be able to turn it in or buy it. 

When weighing leasing versus buying, you should always look at how long you expect to own your car or truck. If you like the idea of keeping a vehicle for a long time (ten years or longer) so that you can take advantage of lower taxes, licensing, and insurance down the line, leasing likely won’t be for you.Leasing a vehicle for business is an ideal choice for those who want a new car every few years, need it to support business needs, don’t have a lot of liquid cash on hand for a large down payment, and aren’t concerned with the sentimental value of car ownership.

Understand the Costs of Leasing

Leasing can be an affordable way to get a newer-model vehicle into your fleet, but it doesn’t have the simplest payment structure. Compared to buying a car outright, which has just a few factors to consider, leasing can be a maze of options, all with varying terms, prices, and penalties. 

Some of the costs you should consider

  • Capitalized cost: Think of this as the price of the lease. After negotiating, this should be lower than the car’s listed price or MSRP.
  • Cap cost reductions: These are discounts that help you reduce the lease price. They can come from things like special offers, trading in an old car, or discounts given to friends and family.
  • Residual value: This is an estimate of how much the car will be worth when your lease ends. If you plan to buy the car after the lease, you’ll want this value to be low. But if you just want to return the car and have smaller monthly payments, a higher residual value works better.
  • Interest rate (or money factor): In leases, interest might be called the “money factor.” To understand it better, multiply the money factor by 2,400. For example, a money factor of .00028 means an annual interest rate of 6.72%.

In addition to the monthly lease payments, you should expect to budget for any down payment, sales tax/title/licensing fees, and any additional local or municipal taxes or fees for purchasing a new vehicle.

What Are the Car Leasing Requirements for a Business?

Car leasing requirements for a business typically include:

  1. Creditworthiness: Strong business credit scores are crucial since they reflect your business’s ability to manage debt and make timely payments. If your business is newer or lacks a credit history, the personal credit of the owner(s) might be considered.
  2. Financial documentation: Leasing companies often require documents such as profit and loss statements, balance sheets, and bank statements to assess the business’s financial health.
  3. Business proof: Documents proving the existence and legitimacy of the business, like a business license, articles of incorporation, or tax ID number, are usually needed.
  4. Insurance: Businesses must secure and provide proof of comprehensive and collision auto insurance that meets the lessor’s minimum requirements.
  5. Guarantor/personal guarantee: Especially for newer businesses, a personal guarantee by the business owner or a guarantor may be required to secure the lease.

These requirements ensure that the business is credible, financially stable, and capable of meeting its leasing obligations.

Tax Considerations for Leasing a Car for Business

Generally, if you use a vehicle strictly for business purposes, you may deduct the entire cost of ownership and operation (though there are some restrictions). If you use it for both business and personal purposes, you may deduct only the cost of the business use and you must track that carefully. 

The IRS generally offers two ways to figure business use: the standard mileage rate method or the actual expense method. You can find the current standard business mileage rate here.

With the actual expense method, you must track the actual vehicle expenses attributable to the use of the vehicle in your business. You can then take a deduction for the cost of car expenses such as fuel, oil, repairs, tires, insurance, registration fees, licenses, and depreciation — and in this case lease payments — attributable to the portion of the total miles driven that are business miles.

The IRS spells out some unique tax considerations for business car leasing

If you choose to use the actual expense method, you can deduct the part of each lease payment that is for business use of the vehicle. But you can’t deduct the lease payment associated with personal use of the vehicle (such as commuting).

You must spread any advance payments over the entire lease period. And you can’t deduct any payments you make to buy a car, truck, or van even if the payments are called “lease payments.”

Finally, if you lease a car, truck, or van for 30 days or more, you may have to reduce your lease payment deduction by an “inclusion amount,” which reduces the deduction for your lease payment. (The IRS explains that this is similar to a depreciation deduction if you purchased a vehicle.) You can find details in IRS Publication 463

Since the tax implications of leasing versus buying can be confusing, it’s wise to talk to your tax professional to decide what’s best for your business. 

Keep in mind that you don’t have to lease a company car through their business to get tax benefits. Following the IRS guidelines for claiming vehicle business expenses, business owners just as easily lease a car personally and then write off qualified business costs through the standard or actual expense method. 

How to Report a Car lease on LLC Taxes

Reporting a car lease on an LLC’s taxes involves recognizing the lease payments as business expenses. Here’s a simplified guide on how to do it:

  1. Determine business use percentage: First, you need to calculate what percentage of the time the leased vehicle is used for business purposes versus personal use. Only the portion of the lease payment that corresponds to business use can be deducted.
  2. Lease payments as deductions: Include the portion of the lease payments that corresponds to business use as a deduction on your LLC’s tax return. For instance, if the car is used 75% for business and 25% for personal use, you can deduct 75% of the lease payments.
  3. Additional expenses: Beyond the lease payment, you can also deduct other vehicle-related expenses that are proportionate to the business use of the vehicle. This includes gas, maintenance, insurance, and registration fees, among others. Each of these expenses should be prorated based on the percentage of business use.
  4. Use the appropriate tax forms: For a single-member LLC, you would typically report this on Schedule C (Form 1040) as part of your personal tax return, as single-member LLCs are considered disregarded entities for tax purposes. For multi-member LLCs, treated as partnerships, you would report this on Form 1065, and then the deductions flow through to the individual members’ Schedule K-1.
  5. Keep detailed records: It’s crucial to maintain meticulous records of both the lease payments and the vehicle’s business use (including a mileage log) to substantiate your deductions in case of an IRS audit.

Consulting with a tax professional can provide tailored advice and ensure compliance with the latest tax laws and regulations, especially since tax situations can vary significantly based on individual circumstances and the specifics of the business vehicle use.

Main Types of Vehicle Leases

Smart buyers should also consider whether they want an open or closed lease.

What’s the difference? Open lease contracts are typical for business vehicle leases, and the buyer is committed to paying any difference between the residual value determined at the time of the lease, and the actual resale value when the lease ends. If you drive the car too much or damage it, the dealer can expect you to cover the difference. 

Closed leases, on the other hand, don’t consider the residual value at the end of the lease, but rather any mileage beyond the original agreement and payment for damages. If you keep within your mileage terms and don’t dent the fender (or cause other excess wear and tear), you can walk away from a closed lease without any surprise costs in the end.

Keep in mind that business leases are generally open because businesses put a lot more miles on their vehicles than consumers do. It may be cheaper in the long run to pay a difference in value than a mileage coverage.

Understand Leasing vs Buying a Car for Business

Here are a few key differences between buying and leasing to consider:

Leasing a CarBuying a Car
Lower monthly payments and no down paymentHigher monthly and down payments
Customization may not be allowedCustomization is allowed
Penalties for higher mileage usage commonUnlimited mileage
Typically comes with a warranty and maintenance included in monthly payments (minimal wear and tear)Maintenance expenses may be the responsibility of the owner
Source: Nav

What Are the Top Questions To Ask When Leasing a Car for Business?

Here are some important questions to ask if you are considering leasing:

  • What type of vehicle do I need, including new/used and/or specialized vehicles or upfits (customizations). If so, what is permitted with the lease terms? 
  • Will the lease be titled in the name of the finance company, business name and/or the owner’s name?
  • Are there mileage limitations, and if so, how do they fit in with my expected business use?
  • What are the excess mileage charges, if any?
  • Will I also use it for personal use, and if so, are there restrictions on personal use?
  • Can I incur charges for excess wear and tear?
  • Are there upfront fees? If so, how much?
  • Is it a closed or open ended lease?
  • What is the residual value after the lease, if applicable?
  • How much are the payments and what are the payment terms?
  • How are repairs handled?

Qualifying for a Business Lease

Most leases today are made through the vehicle manufacturer’s captive finance agencies. A dealer may take an application for the lease, but the dealer itself is not financing the lease.

A few banks offer business vehicle leasing, but this is not as common as it used to be. Leasing companies may help match buyers to dealers offering leases. And dealers often refer buyers to leasing companies. 

If you drive your new car as part of a ride-sharing service such as Lyft or Uber, those companies have leasing programs specifically for their drivers.

If your business has a great business credit score as well as the financial ability to repay the lease (as documented with business bank statements and/or business tax returns), you may be able to get a vehicle lease solely in the name of your business.  (Your business will also likely need to be formed as an LLC or corporation to get a lease that is truly in the name of your business.) 

However, if you have yet to build your business credit profile and don’t qualify for a favorable lease payment plan, you may have to personally guarantee the vehicle. This means that even if your business is unable to make the payments, you would still be personally responsible for doing so. 

Newly established businesses typically must personally guarantee a vehicle, and may need to get a personal lease, so it’s best to work with the financing department to see what the best options are for you. 

Alternative Options to Leasing a Car for Business

If leasing isn’t right for your business, you may want to consider other options.

The most obvious is to find out whether you can buy the vehicle, either outright or with financing. Again, if you drive the vehicle for business use, you may still be able to take advantage of tax deductions for business use, even if the car loan is in your personal name. 

Your business could also consider other types of small business loans to purchase a vehicle, such as a line of credit, term loan, or even a business credit card if you have a large enough credit limit. This can be helpful if you’re trying to buy a very specialized or older vehicle that’s difficult to get financing for. 

Is Leasing Right for Your Business?

Leases can be tricky, and many business professionals put off committing to one because of all the nuances to the contracts and pricing. If you do your research, however, take time, and compare pricing, you can come out of a leasing office with a new car that projects professionalism, gives you reliability, and offers some flexibility in your transportation budget.

If freeing up cash is your aim, it’s worth exploring leasing options for your next business vehicle.

Frequently Asked Questions About Leasing a Car for Business

Can You Lease a Used Car?

Yes it may be possible to lease a used car, but you will have to find the right vehicle and a leasing company willing to finance it. Your selection will be much more limited than for a new car. 

Can You Wrap a Leased Car?

You may be able to wrap a leased car but you’ll want to check your lease agreement, and make sure the company that wraps your vehicle uses high quality materials that can be easily and completely removed. 

What Happens at the End of a Car Lease?

At the end of the lease you typically have the option of buying the vehicle or returning it. In some cases you can extend a lease. If the residual value is lower than the market value, and you still want the vehicle, it may make sense to buy it. (It may be cheaper than trying to find another vehicle.) 

Depending on the terms of your lease, you may have to pay for excess mileage and/or wear and tear.

This article was originally written on March 12, 2019 and updated on March 26, 2024.

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4 responses to “How to Lease a Car Through Your Business

  1. Yes I hit hardship in 2016-2020. I own a cleaning business. When my company van was stolen along with the equipment it really broke my heart. I lost 145,000.00 in revenue. So yes if I could lease another vehicle for business that would help me continuing to help the communities for sure.

  2. Hi Linsey, great article. Is there another website that you can recommend other than NVLA? I went to the site but membership is $795 and they had no free option. I have a small LLC and am only looking to lease one or two vehicles.