If you use a vehicle to travel for your business, leasing a car might be preferred to putting wear and tear on your personal vehicle. The issue is whether you can deduct lease payments from business expenses when the new car lease is expressly for business purposes.
In most circumstances, this is acceptable. However, there are exceptions. The following information will help you understand how to claim a car lease deduction.
Important Questions to Ask Before Applying the Deduction
Generally, business vehicles can be cars, SUVs and/or pickup trucks, and are used for activities related to your business.
Vehicles such as dump truck that are used as equipment and vehicles for hire such as airport transport vans and taxi cabs do not qualify for the deduction.
Sometimes, the deduction that you may receiving for using vehicles is significant. Make the following decisions before you decide this is really the best thing to do.
• Should you use the standard mileage rate for the deduction, or is it better to use actual expenses incurred for the vehicle when used for business purposes?
• Should the business, business owner or employee own the vehicle?
• Should you buy or lease a business vehicle?
Claiming the Car Lease Tax Deduction
Typically, you can deduct lease payments as a business deduction from your taxes when the lease is for a new car that is used in your business. However, you must be careful to keep track of the miles driven in the leased vehicle, whether they are for personal or business reasons.
At the same time, remember that the U.S. Tax Code does not make this as simple as dividing personal and business use 40/60. If you had to make a down payment on the lease, the amount is not immediately tax deductible. Instead, you will need to spread the deduction for the down payment over the life of the vehicle.
In addition, you may also need to reduce the amount you can claim for lease payments. This typically applies when the lease exceeds the annual limit. Hiring a tax professional is helpful in determining what is applicable for your situation if you plan to claim a car lease in business expenses as a tax deduction.
Actual Expenses vs Standard Mileage Rate
As a business, you are given two options in determining the amount of tax deduction you can claim for a car lease. First, you could calculate actual expenses. Second, you may decide that using the standard mileage rate is best for your situation.
For example, choosing the standard mileage rate means you must continue to use if for the entire time you are leasing the vehicle. This includes renewals of the lease. However, you must also meet the following criteria before using the standard mileage rate:
• Do not operate five or more cars at the same time. An example of this is having a fleet operation
• Do not claim a depreciation deduction the leased vehicle unless you are using the straight-line method
• You cannot claim a Section 179 deduction on the same car
There are other stipulations for claiming the deduction on a leased vehicle. You cannot use the special depreciation allowance or claim actual expenses for a car you leased after 1997. Additionally, you cannot be a rural mail carrier who has received a qualified reimbursement.
Claiming actual expenses have fewer stipulations, but you should still consider this option carefully. Before using this deduction, you must calculate your actual cost used for business of owning and operating the vehicle.
These type of expenses include insurance, lease payments, registration fees, gas and other valid expenses. Regular maintenance costs such as oil changes, repairs and tires should also be calculated in the total.