As a small business owner, you probably spend a lot of time behind the wheel. Whether driving to meetings, tradeshows, networking events, or making deliveries, your vehicle likely plays an important role in maintaining smooth business operations.
Eventually, your current vehicle might not cut it, and questions will arise. Should you buy or lease? What are the tax deductions for cars? These are some of the most common questions accountants get from small business owners, and the answer is that it depends.
Buying a Car
From an income tax perspective, deductions for car expenses from your business or employment income will be available over time. And they’re the same whether you buy or lease a vehicle. The Canada Revenue Agency (CRA) decides the rate at which the cost of your car is deducted. The deduction is called Capital Cost Allowance (CCA), also known as depreciation.
If you purchase a new or used car for $30,000 or less before HST, you can deduct 15 percent of the cost the year of purchase and 30 percent of the declining balance every year following that. Based on this formula, you will eventually claim 100 percent of the cost of your car.
You cannot claim any excess amount paid if you purchase a car for more than $30,000. But, if you have a loan on the vehicle, you’ll be eligible to deduct the loan’s interest to a maximum of $300 per month.
Leasing a Car
If you lease a car, you can deduct the monthly lease payments if they don’t exceed $800 plus HST. Generally, the CRA sets limits to ensure that the level of deductions for leased cars is similar to that of purchased ones.
The downside of leasing a car is that the initial down payment isn’t deductible in one lump sum but is spread out over the length of the lease. In other words, it becomes part of the monthly lease payment.
The benefit of one option over the other hinges on the timing of your purchase, the type of car owner you are, and your financial situation.
Timing is Everything
The timing of your purchase is essential. For instance, the same deduction would be available for purchases made on January 1st or December 31st of the same year.
On the other hand, entering into a leasing contract earlier in the year will result in more months of payments and a higher deduction for that year. So, if you were to enter into an agreement in December, it would result in no deduction because no payments have been made on the lease that year.
What Type of Driver Are You?
The type of car owner you are is also critical. If you’re the type of person who drives very few kilometres in a year and enjoys driving a new car, then your best option is to lease a vehicle. But, if you intend to drive your car until it’s dead, you should buy it, as the cost of a lease will far outweigh your borrowing costs in the long run.
Let’s take the example of a car that costs you $500 monthly in a lease, with no down payment and a $10,000 buyout after three years. Buying the same car for $25,000 with zero percent financing will save you $3,000. This is assuming you don’t drive over the maximum allowable kilometres and have $10,000 in the bank in three years.
Know What You Can Afford
Considering your overall financial circumstances will dictate your final decision. Using the above example, if your zero percent financing is only for three years, your monthly payments would be $694. If you don’t have the extra $194 to spend on a car payment, your only option is to lease.
Final Tax Write-Off
Now you know the final tax write-off since you’ve made a decision and determined what portion of those costs you can use for your deduction.
Remember that the final tax write-off will be limited to the business use of the vehicle. Suppose you use your car for business 80 percent of the time. In that case, only that percentage of your monthly lease payments, or your annual depreciation, plus interest, is deductible for tax purposes.
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