Lease a Car for Business Use

When you need a business car, leasing is a great option. You might not have enough money for a down payment, so leasing lets you get a new car with a smaller upfront commitment. A car lease also lets you Build Business Credit, which will help you qualify for business loans in the future.

Steps

Shopping for a Car

1. Identify how much you can spend. Look at your business balance sheet and check how much you can spend to lease a car for your business. Remember that you will still need to pay for gas, insurance, and other expenses.
2. Review inventory online. Many dealerships also have online listings you can browse. You might want to check before you stop into a dealership. You’ll get a general idea of what inventory is available, as well as the cost of the vehicles.
3. Consult a leasing broker. You aren’t limited to leasing from a dealership. Instead, you can work with a leasing broker, who will find a vehicle for you to lease. Leasing brokers aren’t tied to any one manufacturer, so they can search for the best deal on the market for you.
   • Find a leasing broker by searching online or looking in your phone book.
4. Test drive vehicles. Go to the dealership and ask to test drive any vehicles that interest you. Pay attention to how well the vehicle handles and whether you think it will be a good car for your business needs. Test drive as many cars as necessary until you find something you are comfortable with.
   • Remember not to state you are interested in leasing during the test drive. Your monthly payments will be based off the purchase price, and you want the dealer to negotiate believing you intend to buy.
5. Negotiate a price. Your lease payments will depend on the negotiated purchase price of the vehicle. You will probably pay a price somewhere between the suggested purchase price and the amount the dealer paid for the vehicle wholesale. You can find the wholesale price by buying it from Consumer Reports for a small fee.
   • Start low. The dealer will reject your initial offer, but you want to anchor the negotiations at a low point.
   • Move up in increments—around $500 at a time.
   • Mention that you’ve been shopping at other dealerships around town. Make them compete for your business.

Getting Your Information In Order

1. Gather required documents. The car dealer will want to see certain financial documents. You can call ahead of time and ask what they will need. Typically, you should collect the following:
   • Bank references
   • Trade references
   • Financial statements
   • Business tax returns
2. Review your business credit. The car dealer will pull your business credit score from one of the three credit reporting agencies—Dun & Bradstreet, Experian, or Equifax. Since you don’t know which one they will look at, you should buy all three.
   • Contact the bureaus directly to buy your credit report. You’ll have to pay anywhere from $40 to $100 to get each report.
   • Scan your reports for errors and call the credit reporting agency to dispute anything that is inaccurate. They should investigate.
3. Check your personal credit history. Unless your business is established, any dealer will want to see your personal credit history as well. You should review your credit history and credit score.
   • In the U.S., you’re entitled to one free copy of your credit report each year. You can order a copy from the three national credit reporting agencies by calling 1-877-322-8228 or visiting annualcreditreport.com.
   • Obtain your credit score by looking at your credit card statement or by using a free online website, such as Credit.com or Credit Karma.
4. Fix errors in your personal credit report. You can dispute inaccurate information with the credit reporting agency that has the mistaken information. Dispute online or write a letter. The following errors are common:
   • An account that doesn’t belong to you. It might belong to an ex-spouse or to someone with a similar name or tax ID number.
   • An account listed inaccurately as past-due or in collection.
   • The wrong balance listed.
   • Negative information that should have fallen off. For example, a collection account shouldn’t appear on your credit report after seven years.

Signing a Lease

1. Choose your type of lease. Generally, there are two options for business owners: closed-end and open-end. Carefully analyze your circumstances to choose the type that is best for you.
   • Closed-end lease. You are under no obligation to buy the vehicle at the end of the lease period. However, you must compensate the dealership if the car is in worse shape than is expected. This type of lease is great if you can predict the number of miles you’ll drive.
   • Open-end lease. At the end of the lease period, you will pay the difference between what the car fetches at resale and its expected value based on how long you had it. If the sale exceeds the expected value, then you get a rebate. An open-end lease is good if you want to avoid mileage limitations or charges for excessive wear and tear.
2. Complete a lease application. After you negotiate a price, you should complete a lease application with the dealer. Typically, you’ll need to provide personal information and business information.
3. Check fees. In a closed-end lease, you’ll be charged extra fees if you drive too many miles in a year. For example, many dealers charge if you go over {{safesubst:#invoke:convert|convert}}. Find this out before signing for the lease.
   • They also typically charge fees if the car suffers more damage than ordinary wear and tear. Read the fine print to see how the dealer defines significant damage.
4. Shop around for leases. You aren’t required to sign with the first dealer who makes you an offer. Instead, you can visit other dealerships or work with an independent broker. Find a lease agreement that works with your business budget.
5. Act as the personal guarantor. Generally, the car company will require that someone sign as the personal guarantor. This person will step in and be legally responsible for lease payments if the company can’t make them. As the business owner, you’ll need to sign.
   • This is why the dealership wants to look at your personal credit information.
6. Make your initial down payment. Your initial payment should be less than what you would pay when buying a car. However, you might want to make a big payment, which will lower your overall monthly lease payments.

Claiming a Tax Deduction in the U.S.

1. Keep track of your business use. In the U.S., you can deduct for business use but not personal use. Because of this, if you use your car for both business and personal driving, you should keep careful records of your business mileage. If you only use your car for business, you can simply look at the odometer. Otherwise, you can use a smartphone app to help you track your miles, or you can write down the following:
   • The number of miles you drive for business purposes.
   • The total number of miles driven for the year.
   • Receipts for gasoline, insurance, and other car-related expenses.
2. Choose how to calculate your deduction. You have two choices for calculating the amount of your deduction. As tax time approaches, analyze which works best for you:
   • Standard mileage rate. You multiply your miles driven for work by the applicable rate set by the IRS. In 2017, it is 53.5 cents per mile. You may also deduct for parking fees and tolls. However, if you choose this method in the first year of owning the leased vehicle, you can’t switch in any subsequent year.
   • Actual expenses. You can deduct the business percentage of your oil, gas, insurance, parking, registration fees, lease fees, tires, repairs, etc.
3. Meet with a tax professional. Tax law is complicated, and only a tax professional can provide tailored advice. Meet with a professional to get answers to any questions you have.
   • For example, if you need to make a down payment before you can drive the car home, you should discuss how you will deduct for that amount on your taxes. You generally can’t deduct the entire amount right away.

References

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