You generally can take an income tax deduction for a car lease if you work in real estate or earn income from real estate. However, the amount of the deduction is likely to be less than your total lease payments. In order to calculate your deduction, you’ll need to know the fair market value of the car and the percentage of business use, as well as the amount of the lease payments.
The Internal Revenue Service requires that you calculate the percentage of your car use that is for business or income-producing purposes, even if the vehicle is leased. Commuting between home and your office is considered personal use. You must keep records to substantiate the business and income-producing percentage. Your log should include the date, the destination, the purpose and the mileage of each business use.
Taxpayers also must determine an “inclusion” amount that offsets a portion of the lease payments that otherwise would be deductible. The inclusion amount applies only when the car had a market value of over $18,500 at the start of the lease. The lease agreement normally contains a figure for the capitalized cost of the vehicle, and this figure should be used as its market value. Use the tables in Appendix A of IRS "Publication 4635: Travel, Entertainment, Gift, and Car Expenses” to look up the inclusion amount. It is related to the market value of the car and increases during each tax year of the lease term.
A car was leased in 2009 with a capitalized cost of $32,000. The lease payment is $400 per month or $4,800 per year. For 2011 taxes, the car is in the third year of its lease. Using Appendix A, the applicable inclusion amount is $122. Business use of the car is 70 percent. Therefore, the income tax deduction is $3,274.60, calculated as ($4,800 - $122) x 70%.
Lease Deduction vs. Mileage Deduction
Deducting a portion of your lease payments does not always result in the largest tax deduction. If you leased an economy car at a promotional rate, you should calculate whether you would be better off deducting your business use at the standard mileage rate (51 cents in 2011).
Where to Deduct
Most individuals in the real estate industry are self-employed, even if they “work for" real estate agencies. If you are a sole proprietor, report your automobile lease expense deduction on Form 1040, Schedule C, Line 20a. If you have incorporated you business, report it as part of "Other Deductions" on Form 1120, Line 26 or Form 1120-S, Line 19.
If you made advance payments when you started your lease, you must prorate those payments over the life of the lease.
You cannot deduct lease payments if you deducted the standard mileage rate on the same car in any prior tax years. However, if you change from personal use to partly or all business use of the car, you can begin taking lease payment deductions.
- "Publication 463: Travel, Entertainment, Gift, and Car Expenses"; Internal Revenue Service; 2011
- "South-Western Federal Taxation 2011: Individual Income Taxes"; Eugene Willis, et al.; 2010
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