By If you’re trying to decide between leasing and buying your next business vehicle, one question is probably foremost in your mind:
Which option costs less?
Unfortunately, comparing the costs of leasing and buying isn’t as simple as it looks. To do it right, you must consider not just out-of-pocket costs but also
- cash available,
- the tax benefits of each option, and
- the time value of money.
The Difference between Lease and Buy . . .
When you buy, you own the vehicle free and clear after you repay the loan. So you get the trade-in or sale value of the vehicle when you decide to get rid of it.
When you lease, the dealer or leasing company owns the vehicle, and you pay for its use over the lease term. When the lease ends, you can either buy the vehicle for a “residual value” stated in the lease or walk away and get a new vehicle.
The Gnat’s Whisker
How can you absolutely know whether it’s better to buy or lease? Easy. Just ask us.
If you buy, we’ll find the present value (PV) as follows:
| Cash paid at purchase | Add |
| PV of total monthly payments to buy the vehicle, if financed | Add |
| PV of tax savings from interest deductions | Subtract |
| PV of tax savings from depreciation | Subtract |
| PV of expected cash from sale of the vehicle | Subtract |
| PV of tax benefit if sold at a loss, or tax detriment if sold at a profit | Add or subtract |
| After-tax adjusted present-value cost to buy the vehicle and use it in business | Total of above |
If you lease, we’ll find the present value as follows:
| Cash paid at lease signing | Add |
| PV of monthly lease payments, excluding first and last months | Add |
| PV of security deposit returned at the end of the lease | Subtract |
| PV of tax savings from monthly lease payments | Subtract |
| Tax savings from first month’s lease payment | Subtract |
| PV of tax savings from last month’s lease payment | Subtract |
| PV of tax savings from amortization of lease payment reductions and lease acquisition | Subtract |
| PV of tax effect from tax detriment lease inclusion amounts | Add |
| PV of payments due at the end of the lease term to walk away from the vehicle | Subtract |
| PV of tax savings from walkaway payment | Add |
| After-tax adjusted present-value cost to lease the vehicle and use it in business | Total of above |
Key point. We enter the numbers such as the cost of the vehicle, down payment, lease payments, etc., in our calculator, and the calculator generates all the information above—the details. And from those details, the calculator gives you the results, which look like this:
Three key points here:
- You give us the numbers—we enter them in our calculator.
- The calculator crunches the numbers.
- You see the result in after-tax cash.
If you want me to make the calculations for you, please call me on my direct line at 408-778-9651.