For the typical taxpayer, the IRS doesn’t allow a deduction for lease payments that you make on a personal vehicle. The only exception to this rule is when you use the car for business or work purposes. If you qualify under this exception, claiming your lease deduction is not always straightforward because the IRS requires you to also calculate the portion that relates to your nondeductible personal use.
Deductible Lease Payments
If you do in fact use the car for business purposes and intend on claiming a deduction for the actual lease payment expenses you incur, the IRS limits the amount of your deductible payments. Initially, you must allocate your use of the car between business and personal. However, no allocation is necessary if you only use the vehicle for use in your business. When an allocation is necessary, you can use miles as the basis of your allocation. For example, if you lease a car for your delivery business and the total miles you drive during the year equals 20,000, then 75 percent of lease payments are deductible if 5,000 of those miles were for personal use.
Calculating Inclusion Amounts
The IRS doesn’t allow you to deduct the full lease payments you make, even if you only use the vehicle for work purposes. The IRS requires you to reduce your deduction by the “inclusion amount” you calculate. The IRS provides a fixed dollar amount that relates to the fair market value of the vehicle for each year of the lease term. If you use the vehicle solely for business purposes, you must reduce your deduction by the entire inclusion amount. However, suppose you use the vehicle 25 percent of the time for personal use, only reduce your deduction by 75 percent of the inclusion amount.
Alternative Standard Rate
If you prefer not to deduct your actual lease payments and calculate the inclusion amount, use the IRS standard mileage rate. Each year, the federal government determines the rate. Essentially, you multiply the number of business miles you drive by the rate to arrive at your deduction. If you drive a lot, you may even find that using the standard mileage rate yields a larger tax deduction.
If you are claiming the deduction for lease payments as a business expense, report the deduction on the tax form the IRS requires for your specific type of business. For example, if you operate the business as a corporation, report the lease payments directly on your Form 1120. However, if you are an employee and deduct the lease payments as a job-related expense, you must elect to itemize your deductions and also prepare a Form 2106 to report your lease expense.
- IRS: Publication 463 - Travel, Entertainment, Gift and Car Expenses; Feb. 2011
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Jeff Franco's professional writing career began in 2010. With expertise in federal taxation, law and accounting, he has published articles in various online publications. Franco holds a Master of Business Administration in accounting and a Master of Science in taxation from Fordham University. He also holds a Juris Doctor from Brooklyn Law School.