Can Car Lease Payments Be Deducted?

The deductibility of car lease payments is a common concern for individuals and businesses, as these payments can represent a significant operational cost. The Internal Revenue Service (IRS) allows for certain deductions related to business vehicle use, and leased vehicles can qualify under specific conditions.

Eligibility for Deduction

Taxpayers can deduct car lease payments when the vehicle is used for business purposes. This applies primarily to businesses, including S corporations, C corporations, and partnerships, as well as self-employed individuals such as sole proprietors and independent contractors. The vehicle must be used in connection with a trade or business.

For employees, the ability to deduct unreimbursed car lease payments is generally not permitted under current federal income tax law. The Tax Cuts and Jobs Act (TCJA) of 2017 suspended most miscellaneous itemized deductions subject to the 2% adjusted gross income (AGI) limitation, which included unreimbursed employee business expenses. This suspension is in effect through 2025, meaning that W-2 employees cannot claim these expenses.

Calculating the Deductible Portion

A primary factor in determining the deductible amount of a car lease payment is the business use percentage of the vehicle. Taxpayers must allocate lease payments based on the proportion of miles driven for business versus personal use. For instance, if a vehicle is driven 10,000 miles in a year, and 7,000 of those miles are for business, then 70% of the lease payments are deductible. Maintaining a detailed mileage log is essential for accurately calculating this percentage.

Inclusion amount rules apply to leased luxury vehicles. These rules prevent taxpayers from fully deducting the cost of very expensive leased cars. If the fair market value of a leased vehicle exceeds a certain threshold at the time of the lease, a portion of the lease payment is effectively non-deductible. For vehicles first leased in 2025, this threshold is $62,000 for both passenger cars and SUVs, trucks, or vans. This inclusion amount results in a permanent reduction in the taxpayer’s deduction for lease payments, equalizing the tax benefits between leasing and owning higher-value business vehicles.

Choosing a Deduction Method

Taxpayers have two primary methods for deducting vehicle expenses, including those related to car leases: the actual expense method and the standard mileage rate. Each method treats car lease payments differently.

Under the actual expense method, taxpayers deduct the actual costs of operating the vehicle for business purposes. This includes the deductible portion of lease payments, along with other costs such as fuel, oil, repairs, insurance, and registration fees. This method requires detailed record-keeping of all vehicle-related expenditures to substantiate the deduction. If this method is chosen for a leased vehicle, only the business portion of the lease payment is deducted, and the vehicle is not depreciated, as depreciation applies to owned vehicles.

Alternatively, the standard mileage rate allows taxpayers to deduct a set amount per business mile driven, which is 70 cents per mile for 2025. This rate covers the costs of operating a vehicle, including fuel, oil, repairs, insurance, and depreciation. If the standard mileage rate is chosen for a leased vehicle, lease payments cannot be separately deducted. If the standard mileage rate is elected for a leased vehicle in the first year of business use, that method must be used for the entire lease period, including any renewals.

Maintaining Essential Records

Regardless of the deduction method chosen, maintaining accurate records is important for substantiating car lease payment deductions and vehicle expenses. The IRS requires detailed documentation to support any claimed deductions. Failing to adequately track expenses can lead to the denial of deductions and potential penalties.

A detailed mileage log is fundamental. This log should include the date of each trip, the destination, the business purpose, and the odometer readings at the start and end of the trip, to accurately track total business miles. Taxpayers must also retain the original lease agreement and all payment receipts or statements for the leased vehicle. For those utilizing the actual expense method, receipts must be kept for all related vehicle expenses, such as fuel, maintenance, and insurance. These records must be organized and accessible, and the IRS emphasizes “contemporaneous” record-keeping, meaning entries should be made contemporaneously.