Unlocking the Tax Benefits of Car Leasing for Business

Watching James Bond zip around London in an Aston Martin can make anyone envious of sleek, high-performance cars. But with over 50 new car models released annually in the US, leasing has become a popular option to satisfy car envy without the commitment of ownership. Besides the convenience and flexibility, leasing a car can also offer significant tax benefits, particularly for business owners and self-employed individuals.

Can You Write Off a Car Lease?

Yes, you can! The IRS allows car lease payments to be deducted as a business expense. This is particularly relevant for self-employed individuals and business owners from every industry. Many assume that only owned cars qualify for tax deductions, but leased cars are also eligible and can have significant benefits.

How Much of a Car Lease Can You Write Off?

The deductible amount depends on how much the car is used for business. If the car is used exclusively for business, the entire lease payment is deductible. However, if the car is used for both personal and business purposes, you can only deduct the business portion of the lease.

Determining the Business Portion

To determine the business portion, you need to track your mileage. Here’s a simple example:

● Total mileage: 12,000 miles

● Business mileage: 8,000 miles

● Personal mileage: 4,000 miles

The business portion is 66%, calculated by dividing the business mileage by the total mileage (8,000 ÷ 12,000).

Methods to Write Off Your Car Lease

There are two primary methods for writing off a car lease: the actual expense method and the standard mileage rate.

Using Actual Expenses

This method involves deducting actual car-related expenses, multiplied by the business use percentage. Expenses include:

● Lease payments

● Fuel

● Insurance

● Oil changes

● Repairs

● Maintenance

Using the Standard Mileage Rate

The IRS sets a standard mileage rate each year, reflecting the average cost of operating a vehicle. For 2023, the rate is $0.655 per mile, and for 2024, it’s $0.67 per mile. To calculate your deduction, multiply the business miles driven by the standard rate.

Choosing the Best Method

For moderate business use, actual expenses could be more beneficial. Note that once you choose a method for a leased vehicle, you must stick with it for the entire lease term.

Deducting Sales Tax on a Car Lease

Sales tax included in your lease payment can also be deducted. This tax is often part of the monthly lease cost and should be itemized on your statements. There are two ways to write off sales tax:

● As a business expense: Deduct the business portion of the sales tax on your Schedule C under “Car and Truck Expenses.”

● Itemized deductions: Deduct the entire sales tax amount as an itemized deduction on your tax return.

Practical Tips for Maximizing Your Car Lease Deductions

1. Keep Detailed Records: Maintain a log of your business and personal mileage, and keep all receipts for car-related expenses.

2. Use Apps for Tracking: Utilize mileage tracking apps to simplify record-keeping and ensure accuracy.

3. Consult a Tax Professional: A tax advisor can help you navigate the complexities and ensure you maximize your deductions.

Conclusion

Leasing a car for business purposes offers not just the allure of driving new models but also significant tax benefits. By understanding how to properly write off lease payments, including sales tax, and choosing the right deduction method, you can make the most of your car lease. Whether you’re a business owner or a self-employed professional, leveraging these tax advantages can improve your financial health while keeping you on the road in style.

Disclaimer: Doering Leasing Co dba DreamLease and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging.

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