Drivers face the same predicament when shopping for a car: Do I buy or lease a vehicle? It’s a decision that can’t be made lightly. As most drivers know, either option will have a direct impact on your monthly expenses. While buying guarantees more freedom, hence no mileage restrictions nor wear-and-tear charges, leasing certainly has its advantages too. Particularly, for self-employed and business owners when tax season arrives.
The benefits of leasing include easy trade-ins, low cost car repairs, and manageable monthly payments. Not to mention, leasing a vehicle could help qualifying taxpayers maximize their tax bill through car-related deductions. If you drive your vehicle for business purposes, chances are you qualify for a car lease payment deduction. Read on to learn about the IRS guidelines for calculating and deducting this common driving expense.
Are car lease payments tax deductible?
In short, yes! Car lease payments are considered a qualifying vehicle tax deduction, according to the IRS. With that being said, there are restrictions on who can and who can't write off this common business expense. First and foremost, you must be self-employed or a business owner to qualify for a car lease payment write-off. Unfortunately, W-2 employees can no longer itemize vehicle expenses, like fuel costs, lease payments, and insurance.
How much of a car lease can I write off?
Here’s where things get a little tricky. Although business owners and self-employed individuals are allowed to write off car lease payments, the IRS only permits qualified taxpayers to write off the “business use” of their vehicle. This means, personal drives do not count. In fact, your time commuting to and from work won’t qualify either. Of course, this is not a problem if you drive your car 100% of the time for business purposes. In that case, you may deduct the full expense.
However, most taxpayers use their vehicle for business and personal needs. Point being, some extra information is necessary. The best approach to portioning your business miles from personal miles is to keep a mileage log. This will help you determine what percentage of the time you drive your car for business. For example, let’s say you drive your car 60% of the time for work. The IRS will let you deduct 60% of your car lease payment on your tax return.
How do I deduct car lease payments?
For vehicle tax deductions, you have two options for calculating business expenses: the actual expense method or the standard mileage rate.
With the actual expense method, you can itemize a number of car-related expenses, including fuel costs, insurance, maintenance and repairs. This method also allows you to deduct a portion of your car lease payments. As mentioned above, you may only deduct the amount related to business use. Keep in mind, the IRS expects documentation of all these business claims.
A lot of taxpayers choose the standard mileage deduction instead. This IRS rate reflects the average expense of operating a vehicle per year. For 2022, the standard mileage rate is 58.5 cents for every business mile driven. Beyond mileage, you may deduct items like parking and tolls as well. However, car lease payments are not deductible if you choose this method.
So which deduction method is better?
The answer usually depends on how often you use your vehicle for business purposes. If you rack up a ton of miles on your odometer each week, the mileage deduction will likely yield the highest savings. Alternatively, the actual expense method may work in your favor if you drive an average amount and have other substantial car-related costs, including fuel, insurance and car payments to consider. In general, the better deduction method may vary by year. But, with leasing a car, you don't have the option to alternate.
Are there restrictions to deducting car lease payments?
There is one very crucial distinction between buying and leasing a vehicle for business purposes. It’s important to note that you must use the same deduction method throughout the entire lease period. For instance, if you use the standard mileage rate for the first year of your lease, you must continue to do so for future years. Same goes for the actual expense method. That is why it's important for qualified taxpayers to weigh the pros and cons of each method before deciding which to use.
Wish to know more about tax deductible car expenses? Browse MileIQ resources to find out if car loan interest is also an eligible write off .
