If you are making use of your leased car for business purposes, you can write-off some of your expenses on your taxes. However, it is important to understand what constitutes a legitimate vehicle expense in order to avoid trouble with the IRS.
Business and Personal Usage
You may only write-off expenses that are related to your business use. This can be especially important for small business owners, who often use the same vehicle for business and personal purposes. For this reason, you cannot write-off any expenses related to your vehicle lease if you are using your car for personal purposes, such as taking your children to school, regular commuting activity or shopping for your own personal needs. It is vitally important that you keep records of all business-related activity and be prepared to justify those expenses to the IRS should they demand proof that the vehicle was being used for a business-related purpose.
Commuting to Work
Most normal commuting activity cannot be used as a legitimate expense for deduction purposes. However, there are some cases where you can deduct the cost of commuting to and from your work.
Driving From Your Home Office
If your home office is your principal place of business, you can deduct the cost of all trips you take from the home office to another business location. For example, an individual working at a home office who drives to a second location where he or she does the rest of the work can deduct the cost of the commute from his or her taxes.
Temporary Work Locations
Another case where it is possible to deduct the cost of a commute is when the individual is working at a temporary work location. The IRS defines temporary work locations as a place where the individual is expected to work for less than a year. Any place where business-related work is performed can be counted as a temporary work location.
For example, a mechanic leases his work truck. Using the truck to travel to a client’s home in order to repair the vehicle counts as a deductible expense. This is the case even if the individual makes other stops on the way to or from the temporary work location. For example, if you commute to your office, which would normally not be a legitimate deduction, stopping at a temporary work location turns the entire commute into a deductible expense.
However, remember that it is vital to document all of your business-related mileage. Without such a log, you may have no way to prove to the IRS that your driving was actually business related.
Using a Lease as a Legitimate Expense
You may only apply the proportion of your expenses that were used for business purposes. For example, if your monthly lease payment for your car is $1,000.00 and 75 percent of your car’s use is for business related purposes, you may take $750.00 as a tax-write off for every month.
When you are using your car for business-related matters, you can deduct the portion of your lease payment that is applied to those purposes. You may only deduct the portion of your lease payment that is related to the current year. So, if you have paid for five years of a car lease via advance payments, you may only deduct the portion of those payments applying to your current tax year.
Ultimately, if you properly document your business-related mileage when using your leased vehicle, you can end up dramatically reducing your tax bill. Just remember that you will need to carefully distinguish between business and personal use, document your vehicle usage, and keep accurate records in order to ensure that the IRS will accept your tax write-offs.