Are Car Lease Payments Tax Deductible?

When a vehicle is leased for business purposes, the payments made can often be deducted on a tax return. This area of tax law is frequently of interest to small business owners and self-employed individuals. Understanding the specific conditions and requirements for these deductions is important for accurate tax reporting. The ability to deduct car lease payments primarily depends on the vehicle’s use in a trade or business.

Eligibility for Deduction

Car lease payment deductions are generally available to businesses and self-employed individuals, including sole proprietors, partners, and LLC members taxed as partnerships. Employees typically cannot deduct unreimbursed business vehicle expenses due to the Tax Cuts and Jobs Act of 2017, which suspended these deductions from 2018 through 2025.

For a car lease payment to be deductible, the vehicle must be used for “ordinary and necessary” business purposes. An ordinary expense is common and accepted in your trade or business, while a necessary expense is helpful and appropriate for your business. Examples of business use include traveling to meet clients, transporting goods, or moving between different business locations.

Expenses for personal use, such as commuting, are not deductible. If a vehicle is used for both business and personal activities, only the business portion can be deducted. Standard passenger cars, light trucks, and vans typically qualify, provided they meet business use criteria.

Calculating Your Deduction

For leased vehicles, the actual expenses method is used to determine the deductible amount. This method allows you to include the pro-rata portion of lease payments based on the percentage of business use. Other operating costs like fuel, oil, repairs, maintenance, insurance premiums, registration fees, tolls, and parking fees incurred for business purposes are also deductible.

To calculate the deductible amount, you determine the percentage of miles driven for business relative to the total miles driven for the year. This business-use percentage is then applied to each eligible expense. For instance, if 70% of your vehicle’s use was for business, you could deduct 70% of your total lease payments and 70% of other vehicle-related costs.

A specific rule applies to leased vehicles with a fair market value above a certain threshold. For such vehicles, deductible lease payments must be reduced by a “lease inclusion amount.” This mechanism equalizes tax treatment between leasing and purchasing more expensive vehicles. For example, a lease inclusion amount applies to a 2024 lease if the vehicle’s fair market value was over $62,000 for passenger cars or $64,000 for SUVs, trucks, or vans.

The specific lease inclusion amount is determined by IRS tables, varying by the vehicle’s fair market value and lease start year. Refer to IRS guidance, such as Publication 463, for the specific tables and instructions applicable to your lease.

While the standard mileage rate exists as an alternative method for vehicle expense deductions, it is generally not chosen for leased vehicles if the intention is to deduct actual lease payments. The standard mileage rate, which was 67 cents per mile for 2024, already accounts for many vehicle costs like depreciation, fuel, and maintenance. If you choose the standard mileage rate for a leased vehicle in the first year it is used for business, you must continue using that method for the entire lease period, and you cannot deduct actual expenses like lease payments in addition to it.

Documentation and Reporting

Record-keeping is a requirement for substantiating car lease deductions. The IRS requires detailed records to support claims of business use and related expenses. This includes maintaining a mileage log, which is crucial regardless of the deduction method chosen.

A mileage log should document the date of each trip, the destination, the specific business purpose, and the odometer readings at the start and end of each business journey. It is also advisable to record the vehicle’s total mileage at the beginning and end of each tax year. The IRS emphasizes “contemporaneous” recordkeeping, meaning records should be made at or near the time of the expense or trip.

Beyond mileage, retain all receipts and invoices for vehicle-related expenses. This includes documentation for lease payments, fuel purchases, maintenance, repair costs, insurance premiums, tolls, and parking fees. These receipts serve as direct evidence to support claimed deductions.

For self-employed individuals, vehicle expense deductions are reported on Schedule C (Form 1040), Profit or Loss From Business. Lease payments are generally reported on line 20a of Schedule C, with other car and truck expenses listed on line 9.