IRS Rules on Leasing a Car for Business

IRS Rules on Leasing a Car for Business thumbnail

If you lease a vehicle for business use, you are eligible for a number of tax deductions. These can include a set amount for each mile of usage and other operating costs. In some instances, all costs associated with the operation and maintenance of the vehicle may be covered. It’s important to follow the most up-to-date guidelines outlined by the Internal Revenue Service (IRS) to determine which deductions you’re eligible for.

Determining Your Deductible Amount

    There are two methods for determining the tax-deductible amount associated with the operation of your vehicle. There is the Standard Mileage Rate Method or the Actual Expense Method. The Standard Mileage Rate Method is quite a bit easier, but one method may provide a greater tax advantage based on your particular situation, so it’s important to consider both.

Standard Mileage Rate Method

    The Standard Mileage Rate is provided by the IRS for use by taxpayers in determining their vehicle-related tax-deductible amounts. Using the rate provided, it’s a very simple calculation. The Standard Mileage Rate is multiplied by the mileage incurred during business use. The result is the tax-deductible amount. The rates change each year, so it’s important that you check the most up-to-date information on the IRS website.

Actual Expense Method

    To use the Actual Expense Method, you will have to determine how much it actually costs to operate your vehicle while it is being used for business purposes. This includes gas, maintenance like oil and tires, fees associated with registration and a portion of the lease payments. The portion of your lease payments that you may deduct from your taxes is determined by the amount of time the car is used for business purposes.

Inclusion Amounts

    If you have a long-term lease on your car–one that lasts more than 30 days–you will likely have to reduce the amount of the lease payment portion of your total deductible. This is called an inclusion amount and it will vary based on the fair market value of your car.

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