One of the biggest advantages of obtaining a business van lease is that you’ll always be working with a relatively new vehicle, which means you’ll stay abreast of emerging technology and any new safety features.
Leasing a business van may not be the right choice for everyone, but it can certainly provide some good business benefits for the right situations.
Here are some factors you should be aware of when deciding whether leasing a business vehicle would be advantageous for your own company.
Factors involved with a Business Van Lease
When trying to ascertain whether or not leasing a business van would be beneficial for your company, there are a number of factors that come into play and should be considered.
First of all, you should find out how much is the required down payment, and what the sales tax would be on the leasing transaction. The length of the lease will also be important because you’ll want to know exactly how long you will be driving the same vehicle before turning it over in favor of a new one.
You should do some research and find out the manufacturer’s suggested retail price of the vehicle, as well as the final negotiated price. Finally, you should determine what the van’s value will be at the end of the leasing term.
Open or Closed Business Van Lease?
The negotiations for a lease with any dealership will generally include two main options, those being either an open lease or a closed lease.
An open lease is generally associated with commercial vehicles, and this would be the one you would be most interested in for your business. With this type of lease, you pay the difference between the van’s eventual estimated resale value, and its actual resale value when the term of the lease expires.
If you drive more than the estimated van mileage, that will have the effect of depressing the resale value, and it will result in higher costs for your company.
On the other hand, a closed lease would only require you to pay for the extra mileage and any unusual damages which had occurred to the vehicle.
Mileage Estimation
Prior to entering into a lease agreement, it will be necessary to estimate the annual mileage you will put on the van.
A standard lease agreement would allow for a 12,000-mile ceiling each year, and if you expect to put more mileage on than this, it would definitely be worth your while to pay for any extra mileage.
If you don’t do this upfront, you will certainly be charged for it at the end of the leasing term.
Length of the Lease Term
As you might expect, short-term leases cost more than long-term leases, because it reduces the residual value of the vehicle much more quickly over the first 24 months of the lease. You would be best off by matching the length of the lease to your specific preferences and business needs.
If you can negotiate a longer lease, you will generally have lower monthly payments, although if you end up wanting to break that longer lease, it could prove to be much more costly.
Residual Value
This is a frequently used term in vehicle leasing, and it describes the actual value of the car or van at the end of the leasing period. It is also sometimes used to refer to the amount that a company expects to sell an asset when its useful life ends for the company.
You can think of residual value as a function of the rate of depreciation on the car with respect to its actual value. Generally speaking, the longer your leasing term, the lower the residual value will be at the end of that term, simply because the vehicle itself will be older than it would’ve been at the end of a short-term lease.
In this case, you’ll end up paying more in total depreciation by having a longer-term lease.
Lease Agreement Taxes
The business usage of your van can act as a reduction from any ordinary but necessary lease costs. When calculating taxes, there will be two types of leases that include different terms in their contracts.
The first is a lease-as-rent-expense, and in this arrangement, you will be able to deduct payments as rent. When the lease serves as a conditional sales contract, the cost would have to be depreciated over a period of time.
A conditional sales contract is one where at least some of the payments are applied toward the purchase, and this kind of contract would have to follow certain criteria specified by the IRS.
If you involve a conditional sales contract, you might have to depreciate the cost of your van lease, according to the IRS criteria. Plus you might not take the special depreciation allowance if you use the van less than 50% of the time in any given year.
You can deduct a certain part of every lease payment if you decide to use actual expenses, as long as you use the vehicle for business purposes. Also, you cannot deduct any amount from the lease payment when you use the vehicle for personal reasons, for instance commuting back and forth to work.
Deducting your Driving Costs
When you lease a vehicle for business purposes, you will have two options available to you for deducting driving costs. The two options will be dependent on whether you use the standard deduction for the year or whether you use actual costs.
You can deduct business driving costs for your leased van, under a certain set of circumstances and within specified limitations. First of all, you would have to use the car more than 50% of the time for business purposes, and you have to prove that usage was greater than 50% business-related.
You can only deduct costs that come from the business driving of any vehicle you lease. In order to deduct the lease payment, you would have to use the actual cost method rather than the standard deduction, so that you will be able to calculate all your driving deductions.
Any higher-value leased vehicle could be subject to an inclusion amount specified by the IRS, which amounts to a reduction of the actual deduction you take on the leased cost.
