Deducting Vehicle Lease Payments
If you lease a vehicle for your business, you can generally
use the actual cost method of computing
your vehicle expenses. Then, you can deduct each lease payment as
a rental expense. However, when business use of a leased vehicle
is less than 100 percent, the deduction is scaled down in proportion
to the personal use.
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Example If you use a leased car 75 percent for
business, and 25 percent for personal purposes and commuting, you
can deduct only 75 percent of the lease payments. The percentage of
use for business is determined using your mileage
records. |
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Moreover, if a vehicle with a fair market value in excess
of $19,000 (for 2014) is leased, you must add back an additional amount
(i.e., subtract it from your otherwise deductible amount) to offset
a portion of the lease payments. This rule was enacted to prevent
individuals from avoiding the luxury car depreciation limits that
apply to purchased vehicles. The amounts that must be added into your
income are called "inclusion amounts" and are taken from a price-based
table issued annually by the IRS. These tables are published in IRS
Publication 463, Travel, Entertainment, Gifts, and Car Expenses.
Please
note that there is also a separate table for leased trucks and vans.
To use the table, find the value of your car on the first
day of your lease term (or on the day you converted your personal
car to business use) in the first column, and read across the line
to the column that matches the year of your lease to find the dollar
value to be included. Then prorate the dollar amount from the table
for the number of days of the lease term included in your tax year,
and multiply the prorated amount by your percentage of business use
for the year (as calculated by using your mileage records).
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Example Let's say that on January 17, 2010,
you leased a car for 3 years and placed it in service for use in your
business. The car had a fair market value of $32,250 on the first
day of the lease term. You use the car 75 percent for business and
25 person for personal purposes during each year of the lease. Assuming
you continue to use the car 75 percent for business, you use the tables
to arrive at the following inclusion amounts for each year of the
lease:
| Tax Year |
Dollar Amount |
Proration Based on Days Leased |
Business Use (%) |
Inclusion Amount |
| 2010 |
34 |
349/365 |
75 |
$24 |
| 2011 |
74 |
365/365 |
75 |
56 |
| 2012 |
111 |
366/366 |
75 |
83 |
| 2013 |
132 |
16/365 |
75 |
4 |
|
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