Can I deduct lease payments on a business car?

by | Jun 6, 2025 | Business Taxes, Vehicle & Mileage

Here’s what HIVE AI had to say about “Can I deduct lease payments on a business car?”:

Yes, you can deduct lease payments on a business car, but the deductibility depends on several factors including the method you choose, the business use percentage, and potential inclusion amount requirements.

Basic Deductibility of Lease Payments

If you choose to use actual expenses, you can deduct the part of each lease payment that is for the use of the vehicle in your business. IRS – Publication 463: Travel, Gift, and Car Expenses This forms the foundation for deducting business car lease payments. However, You can’t deduct any part of a lease payment that is for personal use of the vehicle, such as commuting. IRS – Publication 463: Travel, Gift, and Car Expenses

The IRS recognizes lease payments as a legitimate business expense when properly allocated. Include gas, oil, repairs, tires, insurance, registration fees, licenses, and depreciation (or lease payments) attributable to the portion of the total miles driven that are business miles. IRS.gov Tax Topics Additionally, You can deduct actual car expenses, which include depreciation (or lease payments), gas and oil, tires, repairs, tune-ups, insurance, and registration fees. IRS – Publication 15-B: Employer’s Tax Guide to Fringe Benefits

Two Methods for Deducting Lease Payments

Standard Mileage Rate Method

If you lease a car, truck, or van that you use in your business, you can use the standard mileage rate or actual expenses to figure your deductible expense. IRS – Publication 463: Travel, Gift, and Car Expenses When using the standard mileage rate, Items such as depreciation or lease payments, maintenance and repairs, tires, gasoline (including all taxes thereon), oil, insurance, and license and registration fees are included in fixed and variable costs for this purpose. Rev. Proc. 2010-51 This means the lease payments are built into the standard mileage rate calculation.

Actual Expense Method

Under the actual expense method, you deduct the actual lease payments allocated to business use. A taxpayer generally may deduct an amount equal to either the business standard mileage rate times the number of business miles traveled or the actual costs (both fixed and variable) the taxpayer pays or incurs that are allocable to traveling those business miles (subject to the limitations in section 4.05 of this revenue procedure). Rev. Proc. 2010-51

Important Timing and Election Requirements

For leased vehicles, there are strict timing requirements: For a car you lease, you must use the standard mileage rate method for the entire lease period (including renewals) if you choose the standard mileage rate. IRS.gov Tax Topics Similarly, If you use the standard mileage rate for a car you lease, you must choose to use it for the entire lease period (including renewals). IRS – Publication 583: Starting a Business and Keeping Records This means you cannot switch between methods during the lease term.

Advance Payment Requirements

You must spread any advance payments over the entire lease period. IRS – Publication 463: Travel, Gift, and Car Expenses This prevents you from deducting large upfront payments in a single tax year and requires amortization over the lease term.

Inclusion Amount Requirements

For expensive leased vehicles, you may face inclusion amount requirements that reduce your deduction. If you lease a car, truck, or van that you use in your business for a lease term of 30 days or more, you may have to include an inclusion amount in your income for each tax year you lease the vehicle. IRS – Publication 463: Travel, Gift, and Car Expenses Instead, you reduce your deduction for your lease payment. IRS – Publication 463: Travel, Gift, and Car Expenses (This reduction has an effect similar to the limit on the depreciation deduction you would have on the vehicle if you owned it.) IRS – Publication 463: Travel, Gift, and Car Expenses

The inclusion amount applies when The inclusion amount applies to each tax year that you lease the vehicle if the fair market value (defined next) when the lease began was more than the amounts shown IRS – Publication 463: Travel, Gift, and Car Expenses in IRS tables. But if you leased a vehicle for a term of 30 days or more, you may have to reduce your deduction by the inclusion amount. See Leasing a Car in chapter 4 of Pub. 463 to figure this amount. IRS – Instruction 1040 (Schedule C): Instructions for Schedule C (Form 1040), Profit or Loss From Business

Business Use Allocation

You must properly allocate lease payments between business and personal use. However, if you use the car for both business and personal purposes, you may deduct only the cost of its business use. IRS.gov Tax Topics If you use your car for both business and personal purposes, you must divide your expenses based on actual mileage. IRS – Publication 15-B: Employer’s Tax Guide to Fringe Benefits

Substantiation Requirements

Even for lease payments, you must meet strict substantiation requirements. Under section 274(d), the elements that must be substantiated to deduct expenses for business use of an automobile are: (1) the amount of each expenditure; (2) the mileage for each business use of the automobile and the total mileage of the automobile during the taxable period; (3) the date of the business use; and (4) the business purpose of the use of the automobile. Dawson U.S. Tax Court Opinions: Jason Daniel Abelitis & Jaime Ann Abelitis

The Tax Court has consistently enforced these requirements. In one case, As best we can determine, the deductions include the costs of mileage, car insurance, gas, and the lease. Dawson U.S. Tax Court Opinions: Noah Schmerling & Susana Schmerling However, Petitioners’ mileage log does not show a beginning destination, nor does it state the business purpose of the use of the automobile, as required under Temporary Treasury Regulation § 1.274-5T(b)(6). Dawson U.S. Tax Court Opinions: Noah Schmerling & Susana Schmerling

In another case involving inadequate substantiation, Following concessions, and as relevant here on that Schedule C petitioner claimed an $11,300 deduction for “car and truck” expenses and a $6,708 deduction for “car rental” payments. Both deductions relate to the use of the same rented automobile that petitioner used for self-employment, commuting, and personal purposes. Dawson U.S. Tax Court Opinions: Erika Denise Edwards Neither deduction, although of a type allowable as a trade or business expense deduction under section 162 if properly substantiated, has been supported by the contemporaneous records required for deduction pursuant to section 274(d). Dawson U.S. Tax Court Opinions: Erika Denise Edwards

Operating vs. Capital Leases

The tax treatment depends on whether the lease is classified as an operating lease or capital lease. The Code makes a distinction allowing deductions for operating leases and disallowing deductions for capital leases. Dawson U.S. Tax Court Opinions: Christopher Holden Section 162(a)(3) allows a taxpayer to deduct as a business expense only the cost of operating leases. Dawson U.S. Tax Court Opinions: Christopher Holden

In Yearout we defined an operating lease as a lease where the lessee pays to make use of an asset during the lease term but does not have an option to purchase the equipment at the termination of the lease period. Dawson U.S. Tax Court Opinions: Christopher Holden Conversely, In a prior case, we defined a capital lease of equipment as an agreement by a lessee to purchase that equipment over time after making a series of lease payments during a set period and thereafter being entitled to acquire the property at a nominal cost at the end of the lease term. Dawson U.S. Tax Court Opinions: Christopher Holden

Practical Considerations

When deciding whether to deduct lease payments:

Choose Your Method Early: Remember that for leased vehicles, you must use the same method (standard mileage or actual expenses) for the entire lease period.

Track Business Use: Maintain detailed records of business versus personal use to properly allocate lease payments.

Consider Inclusion Amounts: For expensive vehicles, calculate whether inclusion amounts will reduce your deduction significantly.

Maintain Proper Documentation: Keep contemporaneous records of business use, including mileage logs with dates, destinations, and business purposes.

Separate Business from Personal: Clearly distinguish business use from commuting and personal use, as only the business portion is deductible.

In summary, lease payments on business cars are deductible when properly substantiated and allocated to business use. You can use either the standard mileage rate (which includes lease payments) or actual expenses (including the business portion of lease payments), but you must choose one method for the entire lease period. Expensive vehicles may be subject to inclusion amounts that reduce the deduction, and all vehicle expenses require strict substantiation under Section 274(d).

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