Many business are faced with the decision if it is either better to purchase a vehicle or simply lease one. Each will have its own tax advantage herefore its impotant to review the benefits to see what will best suit your business. The main difference, tax wise, between purchasing or leasing a company vehicle is depreciation. When you purchase a vehicle, you get to depreciate the full cost of the vehicle within normaly a period of 5 years, its useful life. This means that you get a portion of the cost as a deduction in each of the 5 year period. Aside from that, if you finance the vehicle, you also get to deduct any interest that you paid during the year. When you lease the vehicle, you get a deduction for all of the lease payments at 100% rate, so its a little bit diferent. It’s also important to mention that in certain circunstances, you are allowed to depreciate the full cost of the newly purchased vehicle in the year of purchase. Which makes great for tax planning purposes. However, there is a downside to depreciation. Tha tis, When the vehicle is later sold, you will need recapture the full depreciation amount. For exemple, if you purchased a vehicle for $5,000 and it has fully depreciated, that is the full $5,000 has depreciated. And you are now selling it for $1,000, you will technically have a $1,000 gain. That is beacause the initial basis of $5,000, the purchase amount will now have to be reduced by $5,000, the accumulated depreciation, leaving you with a $0 cost basis in the vehicle. And since it is being sold for $1,000, you have $1,000 gain on the sale. When it comes to deciding whether purchasing or leasing a vehicle is the best option for your business, it is important to consult with experienced tax advisors. Here at Leader Associates, we are experienced with all tax matters and would be more than happy to consult or discuss any important business decision your business may have.
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