Leasing vs. Buying Vehicles

You may be at a point as a small business owner where you’re questioning whether you should lease or buy vehicles. Whatever the reason may be for you to do your due diligence, it definitely depends on your financial goals, usage needs, and tax strategy. There are benefits and disadvantages to leasing or buying a vehicle, and it heavily relies on your understanding of your finances.

Benefits and Disadvantages of Buying a Vehicle

The main benefit of buying a vehicle is the potential to own it outright if you have a loan towards it, or to own it outright if you don’t have a loan and pay it in one installment. It then stays as an asset on your books and can build equity.

However, the value drops quickly; thus, for tax purposes, depreciation will be calculated depending on the total value. For example, as of July 2025, one current strategy allows you to purchase a $50,000 vehicle and depreciate it over five years using a straight-line depreciation schedule.

This is where you divide the price over 5 years. There are a few other depreciation schedules used, and depreciation calculators are also available online. But it’s advisable to leave this to your tax professional to determine which deduction gives you the best benefit based on your situation. If, however, you would like to read more on this topic, read blogs such as “Car depreciation: What it is and how it works” to learn more.

Another benefit of buying a vehicle is that if you purchase a used vehicle (typically 2–3 years old), you skip the worst of the depreciation and still get a reliable vehicle. In contrast, if you were to buy a new vehicle, it would make more sense for long-term plans, such as keeping it for 7– 10 years or more. Or if you need specific models for tax write-offs, like heavy-duty trucks.

It also makes sense if you are considering wrapping your company brand on your vehicle for advertising purposes or if you want to customize it to best fit your company’s needs. Owning the vehicle also allows you to avoid mileage restrictions. Additionally, once it’s paid off, your vehicle expenses will be limited to fuel and repairs. Additionally, compared to leasing vehicles, you will typically have lower insurance premiums.

However, here is where we consider the disadvantages of buying a vehicle for your company. If you buy an older vehicle (such as one 10 years or older), you’ll have significantly higher gas expenses. The vehicles’ miles per gallon drop as it age because of natural mechanical wear and tear. With buying a newer vehicle, you’ll have to face the issue of the value dropping quickly, especially in the first few years.

Another factor is the maintenance on your vehicle; after warranties expire, you will have higher expenses over time. In terms of financing, you will incur higher upfront costs, such as the down payment or full purchase cost. Alternatively, depending on your interest rate, you may also face high interest expenses. You may also experience the inconveniences of reselling a fleet vehicle if your company outgrows it or you can no longer afford it.

Benefits and Disadvantages of Leasing a Vehicle

On the other hand, leasing a vehicle allows you to avoid the steep depreciation, as you return the vehicle before it loses most of its value.

They typically have lower monthly payments compared to loan payments. You could also have a newer vehicle, which would lower your risk of malfunction. However, many leases include warranty/maintenance coverage. Some leasing businesses offer maintenance programs that include scheduled appointments at no additional cost.

Another potential benefit to consider is the ability of lease payments to be deductible as a business expense based on the percentage of business use. Additionally, with a commercial lease, the term of the agreement may range from 5 years to 2–4 years.

So, let’s say you don’t like the vehicle for any given reason; it’s less of a hassle for you to give it back because you will eventually. Leasing is the most suitable option for you if it’s important to you to have the latest technology and achieve great fuel efficiency.

In addition, leasing a vehicle generally has lower upfront costs than buying one. You could have a smaller down payment or none at all, which will allow you to use those funds for marketing, inventory, or the needs of another company. If you are looking for multiple vehicles, many leasing companies offer fleet discounts, consolidated billing, and simplified management for multiple vehicles.

This will then lead to easier budgeting with predictable monthly payments, making cash flow planning simpler, especially if the lease includes maintenance. An added benefit is paying less sales tax when buying compared to purchasing. In many states, you only pay sales tax on the monthly lease payment, rather than the entire vehicle price at once.

Nevertheless, one of the major disadvantages of leasing a vehicle is the restricted mileage usage. You will need to track not exceeding a certain amount, often around 15,000-20,000 miles/year, but it can also be from 20,000 to 30,000 miles/year. If it does happen to exceed the mileage limit, you will incur overage fees for the duration of the lease term. You may also incur additional charges if the damage is excessive and reduces the vehicle’s residual value, as the leasing company will charge to cover that loss.

For example, a 3-year lease has a mileage limit of 15,000 miles/year, which equals 45,000 miles. If you exceed this limit, you will incur overage fees after the 3-year term ends. An additional factor to consider is the higher insurance cost resulting from increased coverage requirements, and the leasing company may require gap insurance to be purchased.

Fleet vehicles are considered commercial vehicles by insurers, so they assume the vehicle will have more driving time and multiple drivers, resulting in higher accident exposure. Additionally, since you don’t own it, you don’t build equity in your business, and over time, leasing can become more expensive.

In short, there are many more benefits and disadvantages that we didn’t cover in this blog. However, the main takeaway is preparing for the future plans of your business by using your financial metrics and travel time metrics to inform the decision of buying or leasing a vehicle. The key considerations are how long you plan to keep the vehicle, how willing and capable your company is to pay for maintenance and repairs, and how it will impact the company’s tax filing.

One more important tip: if you’re going to a dealership to lease a vehicle, make sure to ask about the money factor of the lease to compare the interest rate on the lease with the interest rate on a loan. If this blog helped you in any way, please feel free to read more of our informational blogs or visit our YouTube channel.

In the event that you search for more information or need help with your business finances, contact us at Waterford Business Solutions. We have the team to provide you with further assistance in accounting and tax relations.