Tax Laws for Leasing a Car

Leasing can be advantageous if you own a business.

Leasing a car has numerous advantages for your business, some of which involve your tax payments. Essentially, you can deduct payments you made on your lease from your taxable income at the conclusion of each year--provided the lease was used for business purposes. If you used it for a combination of business and private purposes, you can still deduct a proportion of your lease payments.

Lease Payments

You can deduct the total of your lease payments if you used the leased car for nothing but business. This means that you would not have made one trip to the grocery store or driven to one friend's house for the entire year.

More commonly is a proportional arrangement, which is not hard to calculate as long as you prepare. It's necessary to keep a log of every trip you make in the car--the amount of time and the mileage. At the end of the tax year, calculate what proportion of your time you spent on business and what proportion you spent on pleasure.

So if your total annual lease payment is $10,000, and your figures show that you spent exactly half of your time on business and half of your time on personal things, you can deduct $5,000 from your taxable income (not your taxes themselves). So, if you made $60,000, you can deduct $5,000, and therefore be taxed on a smaller amount.

Associated Costs

The same can be calculated for associated costs, like repairs, fuel, and the like. Because these things apply to both business and pleasure (it is difficult to change a tire for only half the time, for example), you can just subtract their total cost at the same proportion that you subtracted the lease costs.

Lease Inclusion

The lease inclusion is designed to make owning and buying equally good options in terms of the IRS. Without it, it would sometimes be slightly better to lease a car rather than own it, as lease payments are usually larger than depreciation (which is what you deduct when you own a car).

So, to compensate the IRS has published schedules to show how much you need to add to your taxable income (and subtract from your deduction). These tables are based on the market value of the car, the year you leased it, and how long you have leased it for. A $20,000 car leased in 2000 would have a lease inclusion of $185 in 2000, $181, in 2001, $103 in 2002, $104 in 2003, $77 in 2005 and $89 in every subsequent year.

References

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