Whether you are growing your company or thinking of investing in additional business assets, buying your first business vehicle comes with its own set of considerations. Approximately 54 percent of small business owners say they end up using their truck, van, or car in their business, according to a Manta survey. Getting it right often depends not only on the timing of your business but on the answers to several financial questions, from whether your business can afford it now to whether your cash flow can absorb its running costs.
Are You Better Off Buying Or Leasing A Vehicle For Your Business?
One of the most important questions to ask when thinking of buying a business vehicle is: Can my business afford it? When it comes to buying a business vehicle, there are several ownership options, all with different financial commitments. If you choose to buy a vehicle outright you get full ownership until the end of its useful life. It also comes with a higher purchase tag upfront. Leasing, on the other hand, requires less capital investment upfront but also means ownership remains with the leasor. The projected cash flow and financial budget for your small business will help you in determining what option is best.
Can Your Business Cover The Ongoing Expenses Of A New Asset?
To keep your new business asset in optimum condition and avoid danger to your employees, you will also need to conduct regular maintenance. Neglecting to do this not only hastens the vehicle’s depreciation but damages the return on investment to your business. To extend its useful life and even residual value, ensure your business’s future cash flow can comfortably cover the annual costs of owning a business vehicle.
To get a more accurate cost for your decision, do your research on the average operational costs of the business vehicle model you intend to buy. For instead, if you are looking to buy a business car you can look at the annual service costs according to the model. Similarly, the annual cost of owning a commercial truck is about $180,000 annually or $1.38 per mile on the road for a big rig. There are also the costs of any repairs and fuel, both of which would be classed as a business expense.
Have You Factored In The Cost Of Insurance?
Again, owning a business vehicle comes with additional costs. To protect the driver, your new business vehicle, and the reputation of your business you will need to secure a comprehensive business vehicle insurance package. The cost of your policy will be determined by a few factors including the type of vehicle you buy and the coverage limit you choose. Insurers generally recommend a business auto coverage limit of at least $500,000. If you plan on using the business vehicle as your personal vehicle as well, you will also need to add the Drive Other Car Coverage Endorsement to your policy. One of the best ways to keep your premiums down is to use employees with good driving records or no traffic convictions. If you or an employee does have a major traffic violation on your records, securing a certificate of financial responsibility filing should help you secure coverage.
Will You Have To Increase Your Payroll And Workforce For A New Business Vehicle?
There is also the issue of who will be operating your new business vehicle. This will be heavily influenced by your business plans and how your new vehicle aligns with them. If you are planning to purchase/lease a delivery truck to begin offering delivery services, you will need to consider hiring or retraining an employee to be the driver. This would mean that your business would also need to account for the additional costs of hiring and paying another employee (you could hire a part-time driver to keep costs down in the beginning).
Last but certainly not least, ask yourself if your business will be affected tax-wise. Business owners are allowed to write off business mileage at the rate of 56 cents per mile in 2021 (58.5 cents per mile in 2022). This applies regardless of whether you choose to buy a new or pre-owned vehicle. Business owners can also write off lease payments for business vehicles. To maximize the write-offs allowed, ensure the business vehicle you purchase meets specifications in code section 179 and is used for business purposes more than 50 percent of the time. Speaking with your company accountant or tax professional can help you determine what business benefits you can access after purchasing a business vehicle, and whether it is worthwhile to move forward.