Being an entrepreneur means having to make many important decisions on a daily basis. To make the right decisions on questions regarding serious investments, you have to do an exhaustive cost benefit analysis. 36 percent of business owners say they are uncomfortable with their level of debt. If you don’t want to waste your money, you have to be smart about it.
This is true for everything from hiring more employees to where to locate your office space. Another thing you may be considering for your business is purchasing a company vehicle. Whether or not this would be a sound decision again depends on the costs and benefits. For certain companies, it may be the right decision. For others, not having a company car may save money. With that in mind, here is an overview of some of the questions you should ask when deciding whether or not to invest in a company vehicle.
Is a Vehicle Essential to Your Work?
First of all, you need to be sure that a company vehicle is actually essential to providing your product or service to customers. If you are a salesperson who must constantly be on the road to sell products, obviously you need a vehicle to do that. Other kinds of businesses, let’s say those in the pizza industry for instance, require the use of a vehicle to deliver the product to the consumer.
Using your own personal vehicle may not be cost effective especially in regards to the tax savings you can get by deducting the expense. For example, $40,000 of a $50,000 SUV can be written off on a company’s taxes. However, that is only if the vehicle is used for business. If you use a car for business and for personal use, it cannot be deducted.
Would It Be Better to Outsource?
However, just because vehicles are essential for doing business does not mean it makes good economic sense to own your own company vehicles. Many companies, for example, create physical products that must be delivered to retailers to be sold. However, just because that is the case does not mean you should start buying a fleet of trucks. The average big rig can cost between $130,000 and $180,000. That of course does not include the cost of fuel or the cost to hire drivers and pay them benefits.
Instead, in many cases, it may be a better idea to outsource that distribution to an outside firm that specializes in delivering products from company warehouses to retailers. With all the cost that would have to be incurred to have your own trucks and drivers, outsourcing in that case can create cost savings across the board.
Would Leasing Be a Better Idea than Buying?
Like vehicles purchased for personal use, business vehicles can either be leased or bought outright. For many business owners, leasing may be the better deal. This is especially the case if you will use the vehicle often. While depreciation can be deducted from your taxes, it will ultimately take its physical toll on the vehicle itself and its value. After so many miles, it may have very little trade-in value when you want to get a new vehicle. In that case, leasing for shorter periods may be wiser in the long run.
Deducting a leased vehicle, however, works differently than a vehicle that is bought from a dealership. Instead of depreciation being deducted from business income taxes, part of the lease payment is deducted instead. You should also be able to make other deductions for things like auto insurance premiums.
In certain cases, purchasing a company vehicle is a good decision. This is especially the case if you need such a vehicle to perform basic business functions. You will then be able to deduct a good amount of expense from your taxes. In other cases, having company vehicles can be a big drain on resources that could be better allocated elsewhere in your business. Think over the case for and against purchasing vehicles for your company carefully.