If you lease your vehicle, there is a chance that you can take a tax deduction equal to the value of the payments. However, like any other tax law, the answer to the question of whether you can take a deduction depends on many factors. Most importantly, it depends on whether you use the vehicle for business purposes as well as how you account for the use of that vehicle.
Is Your Vehicle Used for Business Purposes
If the answer to this question is no, you cannot deduct the amount of any monthly lease payment. In the event that the car is used for both business and personal reasons, you can deduct whatever portion of the payment is allocated to business use. It should also be noted that even if a car is used for business purposes, you generally don’t deduct the cost of a car payment if it is purchased in either your name or the company’s name.
Do You Itemize Your Vehicle Deductions?
The only way that you are allowed to deduct the cost of a lease payment is if you itemize your deductions. If you do not, you are entitled to reimbursement for every mile that you drive the car for business purposes. Furthermore, you may be entitled to depreciate the vehicle for tax purposes if you choose to take the standard mileage deduction.
You Have to Take the Same Deductions Throughout the Life of the Car
If you choose to take the standard mileage rate one year, you cannot switch to itemizing your deductions in future years. This means that you are stuck with the choice that you make when you first lease the vehicle. However, it may be possible to choose a different accounting method for future vehicles. It may also be possible to appeal to the IRS in an effort to make a change. If you have any questions about your tax status in a given year, it may be a good idea to talk with an accountant or tax adviser.
You May Take a Deduction for Interest on a Loan
While you don’t get to take a deduction for the cost of a monthly car loan payment, you may be entitled to deduct the interest paid on that loan. It may also be possible to take a deduction for any interest paid to a third-party if you borrowed money to make a down payment on a vehicle lease. In many cases, you are required to make a down payment as part of the lease offered by the manufacturer or a dealership.
What If I Incorrectly Take a Deduction That I’m Not Entitled To?
If you find that you incorrectly took a deduction, you may be able to fix the mistake in a matter of seconds if you haven’t filed your return yet. For those who have already filed their return, it may be necessary to file an amended return before the IRS has a chance to audit it. When done quickly enough, you may be able to fix the mistake by paying nothing more than the amount that you owe after the adjustment.
As a business owner, you are obligated to keep costs down however possible. Therefore, if you have the ability to take a deduction on your business taxes, you should do so eagerly. Remember, each dollar that you save in taxes is a dollar that can be reinvested back into your company or returned to shareholders.