Why is long-term rental sometimes better than buying a vehicle?
Owning a car comes with responsibilities – the means of transportation must be insured, covered by depreciation, serviced regularly and many other costs. What’s more, despite constant investment in the vehicle, it loses value almost overnight. There is a reason why it is said that a car immediately after leaving the showroom loses several tens of percent of its value.
Of course, all these costs do not magically disappear when you decide to rent a car – however, the obligations to regulate them are assumed by the owner of the vehicle, i.e. the company providing the rental service. The entrepreneur only has to pay a monthly fee, representing rent for the ability to use the car.
The biggest difference between renting and leasing or credit is that you don’t pay back the principal this way, and the car will never become the property of the lessor. For many entrepreneurs, however, this is not a problem, but actually a great convenience.
Both leasing and credit usually require an equity contribution of up to 50% of the car’s value. The option in which a lessee or borrower does not have to pay an up-front fee, if any, is usually bought with a drastic increase in monthly installments.
If one decides to rent a car, this problem is much less significant – the installments can still be high (especially if the entrepreneur decides on an expensive car or truck), but there is usually no “penalty” sewn into them for lack of contribution. What’s more, the amount of installments does not change throughout the rental period – so possible fluctuations in interest rates do not affect car renters.
How to account for the costs associated with the rental of a company car?
The rules under which businesses can include the cost of renting a vehicle, and operating it, as a deductible expense have changed as of early 2019 – and generally in favor of renters.
First: the lessor does not have to keep mileage records for PIT purposes. This duty was very onerous, and as a result, its incidence was significantly reduced.
Mileage should be kept only if the taxpayer uses the vehicle exclusively in connection with the fulfillment of business purposes and wants to deduct 100% of VAT and 100% of costs on operating expenses. To qualify for these benefits, three conditions must be met to prove that the car is used only for business purposes:
- Keeping records of vehicle mileage for VAT purposes,
- report the car to the tax office (for this purpose, send a completed VAT-26 form to the relevant office),
- Formulation of rules and regulations for the use of the vehicle in the enterprise and adherence to them.
Important!
The following section applies to passenger cars only!
It gets more interesting when an entrepreneur uses the car for both work and private purposes. In such an arrangement, he can also deduct VAT on car-related expenses, but only at 50%. For PIT purposes, on the other hand, he can deduct as much as 75% of the value of operating expenses. What does this mean in practice?
Example:
Mr. Charles filled his rental car to capacity twice in October – once at the beginning of the month and once at the very end. For both refuelings, he paid 480 PLN net (590.40 PLN gross). In addition, the businessman decided in advance to replace the tires with winter tires and wash the car. He paid a total of PLN 270 net (PLN 332.10 gross) for these services.
If Mr. Karol uses the car in mixed mode (and therefore also for private purposes), he can deduct 50% of the VAT, or PLN 86.25 (the total amount of VAT paid is PLN 172.50). He will be able to recognize as a deductible expense the amount of PLN 627.19 (PLN 750 net + PLN 86.25 VAT * 75%).
If Mr. Karol had used the car only for business purposes (and therefore also kept a mileage record), he would have been able to deduct 100% of the costs, so he would have included the amount of PLN 922.50 (PLN 750 net + PLN 172.50 VAT) as a deductible.
VAT and truck rental
The situation is slightly different when a company hires a car weighing more than 3.5 tons. In such an arrangement, the taxpayer can account for 100% of the VAT without meeting additional conditions (such as keeping mileage records).
The regulations also apply to vehicles that do not reach a weight of more than 3.5 tons, but for which their design precludes use for purposes other than business.
Car rental – how to account for it?
It is also possible to include the rental car installment itself as a deductible expense. However, the amount limit is important – it applies to the value of the car as shown on the rental agreement and amounts to PLN 150,000. So if you plan to use a long-term rental for your business needs, it will certainly be more economical to choose a car that does not exceed this value.
Important!
If an entrepreneur rents a higher-value car, he does not lose the right to deduct the cost of the monthly rental installment – but it is limited to a value of PLN 150,000, which means that the installment for a more expensive car will be deductible to a correspondingly smaller extent.
Example:
Mr. Karol pays a monthly installment of PLN 3,690 gross for the car. The value of the car on the rental agreement is PLN 170,000, which means that Mr. Karol will be able to deduct PLN 3,255.88 from each installment (PLN 150,000 limit amount / PLN 170,000 vehicle value * PLN 3,690 installment amount).
Buying back the car at the end of the rental agreement
Is it possible to buy back the vehicle at the end of the rental agreement? In most cases, yes. Thus, if during the use of the car the taxpayer finds that this is what he expected and is ready to bind himself to the vehicle for the long term, he will be able to buy it back. However, he should prepare himself in such a case for a high redemption amount if he did not make a contribution at the beginning of the contract.
Any fees associated with the purchase of the car will also be able to be booked as a business expense. This applies to both the possible initial payment and the redemption amount.
Summary
Long-term car rental for a company is a solution that is finding more and more supporters. This is an especially good option for entrepreneurs who appreciate the opportunity to use new vehicles that meet all standards.
New companies that don’t want to tie themselves into a lease agreement for years with the need to buy out, because it’s difficult for them to determine whether they will still be in business, can also benefit.
Renting gives some flexibility, but this comes at a relatively higher cost. Fortunately, in the case of renting – just like leasing or credit – these costs can be deducted from income.
