Self-employed individuals enjoy many perks of being their own boss. They also have a lot more responsibilities. One of the new tasks that they have is some financial decisions. Decisions that are going to be successful in helping them to earn income. Then decisions that are going to help them save money. One of these is whether a self-employed individual should lease a vehicle. Or should they invest in purchasing one?
The Tax Benefits of Leasing
There is one thought that comes to mind first for self-employed individuals. It is what can they write off as an expense for their business. Most know that a leased vehicle does allow for some expenses. But what they don’t realize is that there are some rules that go with this.
Some figure that if they use their vehicle at all for business purposes, then the entire lease is a write-off. This is not the case unless you are using the vehicle 100% for your self-employment. If you use it for any other purpose than that percentage of use is deducted from what you can claim. So for example, a person may use their vehicle 80% of the time to generate income from their self-employed activities. If so, then they can claim 80% of the lease cost for this.
This is where it can get a little tricky. One has to be aware that the Canada Revenue Agency has specific rules when it comes to luxury vehicles. So the type of vehicle that is leased may play a role in slightly limiting your expenses. The ruling the CRA has on luxury cars purchased applies to depreciation. The CRA classes any vehicle that costs $30,000. Or more before the HST to be a luxury vehicle. So the same is going to apply to the type of vehicle that you are leasing.
The maximum amount that the CRA will allow for lease deductions is $800. per month.
Other Leased Expenses
A self-employed individual can claim other expenses. If they pertain to the leased vehicle. They can claim the gas, servicing, and even insurance premiums. But only up to the percentage that the vehicle usage is for business.
The Tax Benefits of Buying
Self-employed individuals can still buy a car and enjoy claiming some expenses. But the claims are different. It is also going to depend on whether the individual pays for the car all at once. Or if they are going to finance it.
Capital claim cost allowance is a claim. If an individual purchases the car outright. Some think that they can claim the total amount of the car as an expense in the year that they bought the car. This is not true. The cost of the car is spread out over several years. The amount that is claimed each year is based on the ratio that the CRA has scheduled for it. The current ratio is 15% for the year of purchase.
But, also taken into account is the amount of usage for the business purposes. Then the following year and every year following 30% of the previous year’s balance of the value of the car is deducted. This continues until a total claim for the cost of the car is applied for tax purposes. There is one hitch to this. The cost of the car cannot be any more than $30,000. If it is, the excess over and about the $30,000 is not claimable.
Not too many people pay for their business vehicle outright. They usually have to finance it. The good news that comes with this is that a part of the interest paid on the car loan is claimable as a deduction. There is a maximum that’s claimable for the interest charges. This is $300. Per month.
There is still the option of being able to claim the other expenses. It is those that come with the business use of the vehicle. Just like there is with the leasing of a vehicle.
Which is the Best Option?
Both options have their advantages to them. It will come down to which is better for the specific individual.
The self-employed individual has to look at their circumstances. Most find that the lease payments are cheaper than making loan payments. But, there are some negative aspects that come with leasing a vehicle. There can be mileage restrictions with some lease agreements. Also, lease agreements run for a set period. Usually, there is an option to buy out the vehicle when the lease ends.
What needs consideration is the mileage. If one is driving great distances in their self-employed business. There can be mileage rules with leased vehicles. A lot of people like the thought of leasing. It is because each time a lease ends they can set up a new lease agreement for a newer model. This way they are always driving a new car.
Owing the vehicle means once it’s paid for it is the buyer’s vehicle. There are no restrictions on the mileage. The buyer is still responsible to the financing company who financed the vehicle. If something goes wrong with the car, the amount of the loan still has to has to be paid out.
How Do These Options Affect the Cost of Vehicle Insurance?
One thing that Insurance Companies don’t care about is who is the owner of the vehicle. They are insuring the driver. So to them, it doesn’t matter who owns the car. But, the insurance premiums are still used as a deduction. Yet, again it will only apply to the percentage of car usage for business.
Also, keep in mind if you are using the car for business you must inform the insurance company about this use. You will be paying commercial premiums. So these will be higher than personal vehicle insurance. Some individuals neglect to inform their insurance company that they are using the car for self-employment purposes. This is a big mistake. If a claim arises and it has not been declared that the vehicle is used for business the insurance company could refuse to pay. This can be a very costly mistake to make.