Have you wondered whether leasing or buying a truck makes better sense? There are several factors in any lease and additional considerations for an S-Corp.
Table of Contents
- Leasing Basics
- Calculating Costs
- Truck Lease Options
- Tax Issues For S-Corp Truck Leasing
- Pros and Cons of Truck Leasing
- Helpful Lease Resources
If you are a shareholder in an S-corp you should be aware of the pros and cons of truck leasing. It is also critical that you ask the right questions of the dealer.
There may be some benefits to truck leasing for an S-Corp. To make that determination you first must know the basics of leasing.
Open-ended leases and closed ended leases are the two common lease types. In an open-ended lease the truck is expected to be worth a certain amount at the end of the lease term. The amount is also known as the residual value. The dealer will examine the truck and determine how much it is worth at that time. If the car has depreciated more than the estimated amount you will be responsible for the difference. Depreciation is another term for the value of wear and tear on the truck.
A closed-end lease has the opposite contract structure. The terms of the lease are more restricted. There might be a cap on the number of miles driven in a given year for example. The beauty of a closed-end lease is that although the monthly payments may be higher you do not have the same restrictions as you would in an open-ended lease. For this reason a closed-end lease is also known as a walk away lease. After the lease term you walk away from the truck and the dealer bears the risk of depreciation.
TIP: Be careful. Open ended leases may have early termination penalties.
As with almost any purchase cost is a consideration. There are several expenses that go into the total cost of a lease. These expenses include insurance, license fees, title charges, sales tax, security deposits and the down payment.
The Federal Consumer Leasing Act is a law which requires that a truck dealer must clearly inform the customer of the lease in writing. The dealer also must not charge a balloon payment larger than three times the average monthly payment unless:
- A greater amount is determined through legal action
- You entered into a contract agreeing to pay more
- There is excessive depreciation to the vehicle
Here are some key terms that you should be familiar with before entering into a truck lease.
FEES – Fees can include anything from license fees and title fees. Sales tax is a common charge in lease payments.
GAP COVERAGE – Insurance to cover the difference between what is owed and insurance proceeds if the car is destroyed
CAP COST – The capitalized cost reduction, or cap cost, is essentially the down payment. You may also hear the term “cash due at signing” in commercials. The cap cost reduces the difference between the net capitalized cost and the value of the truck at the end of the lease.
TIP: Some dealers will tack on use tax if a purchase is made out of state but no sales tax was collected.
Monthly Lease Expenses
When shopping for a truck lease you need to consider the monthly payments including any possible repairs and maintenance costs.
The monthly cost of a lease depends on several factors including the cost of the truck, the length of the lease, the interest rate as well as the truck’s residual value.
Keep in mind that dealerships seldom lose money on a lease. They will typically establish terms whereby the amount the customer pays each month for the truck is simply the cost of the truck less the residual value. This is why you should try to negotiate the lowest possible purchase price of the truck.
EXAMPLE: Greg and Tammy are shareholders in an S-corp. Greg visits a local dealership and sees he believes will be perfect for the business. The salesman uses the sticker price to quote him a lease cost of $800 per month. Tammy does a little searching and finds another dealer with the same model truck. Only this time the dealer offers her the internet price of $600 per month. The internet price is an offer dealers extend to customers when they want sell on volume and lower profit per vehicle.
TIP: Always compare the cost of a truck lease with the purchase price to determine if leasing or buying is best for you.
More Truck Lease Expenses
You should also be aware of these potential truck lease charges:
- Default Charges – These cover miscellaneous fees including legal fees and any costs incurred if the truck is repossessed.
- Mileage Overage – Some leases may come with a cap on the number of miles that the truck can be driven each year. If you have such a lease and go over that limit you will pay for the additional miles.
- Deposition Fee – Expect to pay a few hundred dollars for the dealer to clean the truck at the end of the lease.
TRUCK LEASE OPTIONS
A truck lease can come with certain terms that you should be aware of. These options can be important factors in deciding if an S-Corp should lease or buy the vehicle.
- Renewal – Some truck dealers offer the option to renew the lease. This can be attractive if you do not have the funds to purchase
- Option To Buy – It is not uncommon for dealers to offer you the chance to buy the truck at the end of the lease term. If you are still in the market for a truck at the end of the lease buying the one you’ve had for the last few years is often safer than buying from an unknown third party. You know the repair and maintenance history of the truck firsthand.
- Early Termination – Dealers want to make a profit on their leases. One way they do this is by charging an early termination fee. If you enter into a lease agreement plan on hanging on to the truck for the entire term.
Maintenance Leases vs. Non-Maintenance Leases
In a non-maintenance lease the dealer is not responsible for the maintenance of the truck. In a maintenance lease the dealer assumes those expenses. If work needs to be done on the truck the lease will usually require that the customer bring the vehicle to the dealer for service.
Dealers will include an additional fee each month to the truck lease for maintenance. You can think of this additional fee, also known as budget maintenance, as a repair fund. Any needed repairs come from this fund and any excess is paid for by the customer.
TAX ISSUES OF S-CORP TRUCK LEASING
Business owners must always be aware of the tax impact of their financial decisions. Leasing a vehicle is just one of those.
When a truck is used for business purposes the S-Corp shareholders must determine whether the mileage rate or the actual vehicle expenses will be deducted. The IRS allows you to deduct a certain amount for each mile the truck is used for business purposes. When the S-Corp owns the vehicle it may decide in the first year to take the mileage deduction and then switch to deduct the actual expenses later on. However, when an S-corp leases a truck and uses the standard mileage rate it must do so for the entire duration of the lease.
Business owners need to be particularly careful about letting employees drive a work truck for personal use. Doing so is viewed by the IRS as providing a taxable benefit to the employee.
When leasing a truck the entire lease payment is not deductible. The S-Corp will instead have to reduce its deduction by the inclusion amount, or a percentage of the fair market value of the truck.
TIP: Be careful when using business vehicles for personal use as this may create taxable income.
PROS AND CONS OF TRUCK LEASING
There are pros and cons of a truck lease. Some of the benefits are that you can:
- Drive a nicer vehicle than you normally can afford
- Preserve cash for other business expenses
- Be less concerned about depreciation
There are also some drawbacks to leasing a truck that you should consider. They include:
- No Ownership
- Less Bargaining Power
- Higher Costs/Fees
For some S-Corp shareholders a lease may be a good option. For others buying may be a wiser financial move. Either way knowing the expected costs beforehand will allow you to compare whether a truck lease is right for you. Still considering a lease? Here are a few questions you should have answered before you sign any lease agreement:
- How much will you be charged if you terminate the lease early?
- What is the yearly mileage limit and how much will you be charged if you go over?
- Is there a purchase option?
- What is the down payment?
- How much will you have to pay at the end of the lease term?
- Can the lease be made to my S-Corp?
- Does the lease call for scheduled maintenance?
HELPFUL LEASE RESOURCES