Company car: This is how leasing protects the company’s liquidity

Company car: This is how leasing protects the company’s liquidity

However, whether company car leasing is really the best solution for managing your own company’s liquidity depends heavily on the terms of the leasing contract. Entrepreneurs should seek detailed advice here and also pay the necessary attention to the small print in the agreement in order to avoid costly traps in the leasing agreement.

Leasing can make you financially flexible

A major advantage of leasing is that it can give a company flexibility, both in terms of financing costs and the choice of company vehicles. At the end of a leasing contract, the leased vehicle can become the company’s property for the long term, but this is not absolutely necessary. Leasing contracts are concluded on average for two to four years. This means that entrepreneurs theoretically have the opportunity to switch to a newer company vehicle every two to four years.

Leasing rates are also relatively low compared to financing rates within the framework of a car or installment loan and tend to burden the company less every month.

Another financial advantage of leasing: the costs incurred as part of a leasing contract can be deducted from tax and thus reduce the company’s tax burden. However, this only applies within the framework conditions defined by tax law.

However, whether a leasing contract really protects the company’s liquidity in the long term and makes the company more economically flexible depends on four key questions that must be clarified during the negotiations for the loan agreement:

  • Is a special payment of the leasing rate possible and how high is it?
  • Can the company terminate or extend the lease early?
  • Does the company have to buy the company car after the lease expires?
  • What are the operating costs after the end of the contract?

(Source: Fincompare company car leasing guide)

kilometers or residual value? This is how leasing really pays off

When it comes to leasing, a distinction is made between kilometer leasing and residual value leasing. Which form of financing is more economical for a company should be checked on a case-by-case basis. A leasing contract with mileage leasing is based on a specified maximum limit of kilometers driven. This variant is more suitable for entrepreneurs who want to cover shorter distances with the vehicle and therefore do not have to expect high mileage.

Since the kilometers driven significantly reduce the value of a vehicle, a high upper limit set in the leasing contract can make financing expensive. In addition, there is a risk of high additional costs if the specified upper limit is exceeded at the end of the contract period. In most cases, each excess kilometer driven is calculated separately and charged to the lessee. The ADAC states that average costs of 10 to 15 cents per additional kilometer can currently be charged.

Residual value leasing involves a high risk for the lessee. If a company leases a vehicle in the form of residual value leasing, it is liable for the contractually agreed residual value of the vehicle at the end of the contract period. This means that it is liable under the contract for all damage to the vehicle and for any depreciation. Fluctuations in the used car market are also a high risk for leasing contracts with residual value agreements. The actual residual value of the vehicle is determined by the current condition and the current value on the used car market. Even the smallest defects, maintenance work that has not been carried out or drops in the price segment can ensure that the vehicle has a lower residual value at the end of the contract period than initially assumed. The risk for this is borne solely by the lessee and any gaps in value that may arise must be fully closed out of his own pocket.

If the value assessment at the end of the contract period shows that a leased vehicle is worth more than assumed when the contract was concluded, the lessee can usually expect a repayment. In standard contracts, this amounts to 75 percent of the amount that the residual value is above the contractual assessment limit. The remaining 25 percent of the added value stays with the leasing company.

The monthly installments for residual value leasing are generally significantly lower than for kilometer leasing, since the assumed residual value serves as the basis for calculating the monthly leasing installment.

Disadvantage for the lessee: Dealers are allowed to calculate leasing rates artificially low and set the residual value of the vehicle correspondingly high. That says a judgment of the Federal Court of Justice, which set a precedent back in 2014. As a result of this legal regulation, the contractual residual value of a leased vehicle does not have to reflect the realistic current market value of the vehicle. Legally, it is only an invoice item that does not have to be assigned an actual sales price at the end of the contract. This judgment also increases the lessee’s risk with residual value leasing and has in the past caused lessees to accept high additional costs.

Deduct leasing costs and special payments for tax purposes

Leasing also incurs costs for the company. They usually consist of the down payment in the leasing contract, the ongoing leasing costs and any possible and contractually agreed special payments. If the vehicle is taken over by the company after the leasing contract has expired, there is usually a residual debt, which can also be settled in the form of a special payment.

The costs arising from the leasing contract affect the company’s balance sheet and its profit and loss account and must therefore be taken into account for tax purposes. The basic requirement for the leasing costs of a company vehicle in connection with an asset to be recognized in the balance sheet is the actual operational use of the vehicle. If this is the case, the monthly leasing costs can be booked directly in the income statement as an additional expense. This reduces the company’s profit and reduces the tax burden. A leasing contract therefore also has a direct impact on equity and the balance sheet total.

Special payments, such as the down payment at the beginning of the leasing contract, any special payments during the term of the contract and a final payment due if the vehicle is to be transferred to the company after the leasing contract has expired, must be treated separately. They are also initially booked against the expense account, which is also used to offset the monthly leasing rate. However, the entire amount of the special payment cannot be immediately claimed as an expense. The non-deductible portion of the special payment is capitalized against the active prepaid expenses and can only be claimed operationally with each monthly installment agreed in the leasing contract within the deductible framework.

A special regulation also applies to companies that International Financial Reporting Standards (IFRS) and for leases entered into after January 1, 2019. Here, companies have to capitalize the full value of the leasing contract and periodically include the costs in the balance sheet as an expense in connection with the monthly installment due. This means that each special payment reduces the total liability from the leasing contract, but can only be claimed as a linear reduction in profit and thus tax relief over the entire term of the contract.

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