Tax Deduction when You Lease a Vehicle for Your Business

The tax deduction you can claim for operating a vehicle is related to business use of the vehicle. If you lease a vehicle for use in your business, you could deduct the expenses of the lease and the operating expenses based on the percentage of business use. If you use the leased vehicle exclusively for business purposes you could deduct 100% of the expenses.

Whether you own or lease a vehicle, you need to keep records of business use. You can generally do this by keeping a log of the miles you drive for business purposes.

When you use a leased vehicle for business purposes you can deduct your expenses using either the standard mileage rate or the actual costs. But if you decide to use the standard mileage rate when you lease a vehicle, you must use the standard mileage rate for the entire lease period. You cannot change from the standard mileage rate to the actual cost method in a subsequent year.

There are also certain restrictions on using the standard mileage rate. You cannot use the standard mileage rate if you use the vehicle to transport persons or property for compensation or hire. And if you operate five or more vehicles at the same time you cannot use the standard mileage rate.

The standard mileage rate is subject to change each year or sometimes during the year. You can find the applicable standard mileage rate on the IRS website.

When you use the actual cost method, you can deduct the cost of gas, oil, repairs, tires, insurance, registration fees, and licenses. When you own the vehicle you could deduct depreciation, and when you lease the vehicle you can deduct the lease payments. All the actual costs would be in proportion to the business use of the vehicle. If you make any advance payments on the lease you would have to spread them over the entire lease period.

When you lease a vehicle, you may have to reduce your deduction for the lease payments by what the IRS refers to as an inclusion amount. This is intended to limit tax deductions for vehicles with a higher value.

There are tables for figuring the inclusion amount in IRS Publication 463, Travel, Entertainment, Gift, and Car Expenses. To figure the inclusion amount that applies, you first need to determine the fair market value of the vehicle on the first day of the lease term. Then, using the applicable table you would find the inclusion amount that corresponds to that fair market value for the tax year you use the vehicle. The inclusion amount is prorated for the number of days of the lease term included in the year, and is multiplied by the percentage of business use of the vehicle.

You can deduct the cost of parking fees and tolls related to business use whether you use the standard mileage rate or the actual cost method.

You should keep receipts and documentation of all your actual costs if you use the actual cost method.

Sources:

Publication 463, Travel, Entertainment, Gift, and Car Expenses, IRS