Are Car Leases Tax Deductible for a Business?

Car lease payments can be tax-deductible for businesses, offering a way to reduce taxable income. This deductibility primarily applies when the leased vehicle is used for business purposes. The Internal Revenue Service (IRS) provides guidelines to determine the extent to which these expenses can be claimed.

Eligibility for Deducting Car Lease Payments

Businesses and self-employed individuals, including sole proprietors, small business owners, and corporations, may qualify for tax deductions. The fundamental requirement for deducting car lease payments, and any business expense, is that it must be “ordinary and necessary” for the business operation. An “ordinary” expense is common and accepted in a particular industry, while a “necessary” expense is helpful and appropriate for the business, though not necessarily indispensable.

A key distinction for deductibility is the use of the vehicle. Only the portion of the lease payment attributable to business use is deductible. Personal use of a leased vehicle is not eligible for tax deductions. For instance, commuting between one’s home and a regular place of business is generally considered personal use and is not deductible. However, travel between business locations or to temporary work sites, clients, or vendors qualifies as business use.

Calculating Business Lease Deductions

Businesses calculate car lease deductions using the “actual expenses method.” This method allows for the deduction of various vehicle-related costs beyond the monthly lease payment. These expenses can include fuel, oil, maintenance, repairs, insurance, and registration fees, provided they are incurred for business use. Sales tax included in monthly lease payments can also be deducted as a business expense.

To determine the deductible amount, businesses must first calculate the vehicle’s business-use percentage. This is done by dividing the total business miles driven by the total miles driven (business and personal) during the tax year. This percentage is then applied to the total qualified expenses, including lease payments. For example, if a vehicle is used 60% for business, 60% of the eligible lease payments and other actual expenses can be deducted.

Important Deductibility Limitations

IRS rules and limitations can affect the deductible amount for leased vehicles, particularly for higher-value vehicles. The “luxury car” lease limitations involve “inclusion amounts.” If a vehicle’s fair market value at the time of lease exceeds a specified threshold, typically around $62,000 for passenger cars and SUVs, trucks, or vans for vehicles leased in 2025, a lease inclusion amount must be added back to gross income. This inclusion amount reduces the deductible portion of the lease payments.

The purpose of these inclusion amounts is to equalize the tax benefits between leasing and owning business vehicles, preventing excessive deductions for luxury leased cars. The specific inclusion amount varies depending on the vehicle’s fair market value and the year the lease began. Any personal use of the leased vehicle directly reduces the deductible amount, underscoring the importance of accurately tracking business versus personal mileage.

Maintaining Records for Car Lease Deductions

Record-keeping is important for substantiating car lease deductions. The IRS requires documentation to prove business use and incurred expenses. A mileage log is required, including date, destination, business purpose, and miles driven for each trip. Odometer readings at the start and end of the year should also be recorded.

Businesses must retain receipts for all car-related expenses, including monthly lease payments, fuel, maintenance, repairs, insurance, and registration fees. Copies of the lease agreement should also be kept. Maintaining these records contemporaneously, meaning at or near the time of the expense or trip, is important for audit purposes. These records support claimed deductions during an IRS inquiry.