Leasing a car is a valuable alternative to purchasing a new vehicle if you want low monthly payments, a minimal down payment, no upfront sales tax and affordable maintenance. When you lease a vehicle, you are paying for the use of the car so you never owe more than the car is worth. The Internal Revenue Service (IRS) offers tax benefits if you lease a car for business-related activities.
If you use a leased vehicle for personal use only, you cannot write off any car expenses on your federal tax return. If you use your leased vehicle for both personal and work-related activities, you can only deduct certain expenses related to its business use.
You can write off work-related expenses by either deducting the standard mileage rate or by deducting actual expenses. According to the IRS, you can include gas, oil, repairs, tires, insurance, registration fees, licenses and lease payments for the portion of miles that were business-related. Parking fees and tolls are also deducible regardless of whether you choose to deduct the standard mileage rate or actual expenses. All expenses must be itemized on Schedule C of Form 1040, as of 2011.
Reimbursed by Employer
If your employer reimburses you for expenses related to the use of your leased car, you cannot deduct those expenses on your federal tax return. The IRS does not consider the reimbursements to be taxable income, so you cannot deduct the expenses on Schedule C of Form 1040. Your employer can take the work expense deduction on his annual return.
Lease Inclusion Amount
According to the IRS, an additional fee can be assessed on a work-related leased vehicle that will reduce your tax deduction. The lease inclusion amount balances out the tax difference between depreciating the vehicle and writing off the lease. IRS Publication 463 provides tables showing lease inclusion fees for vehicles based on their fair market value and lease term. The fee does not increase your income but only decreases the amount of your lease payment tax deduction.
- IRS.gov: Topic 510 -- Business Use of Car
- IRS.gov: Publication 463 -- Travel, Entertainment, Gift and Car Expenses
- Consumer Financial Protection Bureau. "What Should I Know About the Differences Between Leasing and Buying a Vehicle?" Accessed April 12, 2020.
- Merriam-Webster. "Lease." Accessed April 12, 2020.
- AARP. "To Buy or Not To Buy." Accessed April 12, 2020.
- Consumer Financial Protection Bureau. "What is a Manufacturer Suggested Retail Price (MSRP)?" Accessed April 12, 2020.
- LeaseGuide.com. "Capitalized Cost – Cap Cost." Accessed April 12, 2020.
- Autotrader. "Leasing a Car: Can You Negotiate the Price?" Accessed April 12, 2020.
- Edmunds. "The 'Residual Value' of Leasing." Accessed April 12, 2020.
- Federal Reserve. "Keys to Vehicle Leasing: Future Value." Accessed April 12, 2020.
- LeaseGuide.com. "Money Factor—Explained." Accessed April 12, 2020.
- Federal Trade Commission. "Financing or Leasing a Car." April 12, 2020.
- Federal Reserve. "Keys to Vehicle Leasing: End-of-Lease Costs: Closed-End Leases." Accessed April 12, 2020.
As curriculum developer and educator, Kristine Tucker has enjoyed the plethora of English assignments she's read (and graded!) over the years. Her experiences as vice-president of an energy consulting firm have given her the opportunity to explore business writing and HR. Tucker has a BA and holds Ohio teaching credentials.