FORTUNE Small Business:

Your business vehicle: lease or own?

FSB's Anne Fisher examines the tax pros and cons.

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(FORTUNE Small Business) -- Dear FSB: I'm considering either leasing or buying a BMW SUV for my IT consulting business. Which is the better option?

- Ram Mahajan, President
RSoft
Oak Hill, Va.

Dear Ram: That depends on several factors.

One benefit of leasing is that it usually takes a smaller cash outlay upfront, and you can then deduct monthly lease payments as rental expenses on your taxes. Buying requires a bigger initial payment and then depreciating the asset over its useful life, which may mean a smaller annual tax deduction. Since a car's value drops fastest in its first few years, leasing is wiser if you don't plan to keep the vehicle for long.

Ownership makes more sense if the vehicle will get heavy use. Most leases have 10,000- or 12,000-mile annual limits - you'll pay per mile after that, which can add up.

A new development may favor buying: To push drivers to think green, the IRS is offering one-time tax credits to buyers of clean-fuel-burning cars and trucks. The deal is open only to "the original purchaser of a new, qualifying vehicle," the IRS says. "If a qualifying vehicle is leased, the leasing company may claim the credit."

The credits - for instance, $2,600 for a 2008 Toyota (TM) Highlander SUV - must be balanced against a hybrid's higher cost. A gas-burning Highlander costs $27,300, while the hybrid version goes for $33,700. For more information, including a frequently updated list of dozens of eligible vehicles, go to irs.gov (as of this writing, no BMWs make the list).

Whether you lease or buy, you can deduct operating costs such as gas and tolls, or take the standard mileage deduction (50.5 cents a mile for the 2008 tax year). To top of page

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