Can I Write Off a Leased Car on My Taxes?

It is possible to deduct expenses for a leased car on your taxes, provided certain conditions related to its use are met. This article will explain who qualifies for these deductions, the types of expenses that can be claimed, how to calculate the deductible amount, and important record-keeping requirements. Understanding these aspects is key to properly claiming leased car expenses.

Who Can Deduct Leased Car Expenses

Deductions for leased car expenses are primarily available to individuals and businesses that use the vehicle for business or self-employment purposes. This includes self-employed individuals, independent contractors, and small business owners. For these taxpayers, the car must be used to conduct their trade or business activities.

Personal use of a leased vehicle is not deductible. Commuting from your home to a regular place of business is considered personal use and not a deductible business expense. If a vehicle is used for both business and personal purposes, only the portion of expenses attributable to business use can be deducted.

The Tax Cuts and Jobs Act (TCJA) of 2017 eliminated most miscellaneous itemized deductions for employees. This means W-2 employees generally cannot deduct unreimbursed car expenses.

Understanding Deductible Expenses

When a leased car is used for business, various expenses can be deducted. The primary deductible expense is the monthly lease payment. However, the entire payment may not always be deductible, especially for higher-value vehicles, due to certain limitations. This deduction applies only to the business-use portion of the vehicle.

Beyond lease payments, other operating expenses are also deductible. These include gas and oil, routine maintenance and repairs, and insurance premiums. Eligible expenses also include tires, registration fees, parking fees, and tolls, provided they are incurred directly for business travel.

Choosing a Deduction Method

Taxpayers have two primary methods for deducting leased car expenses: the standard mileage rate or the actual expense method. The standard mileage rate is a simplified approach where a set rate per business mile is deducted. For 2025, this rate is 70 cents per mile. This rate is intended to cover costs like depreciation, gas, oil, insurance, and maintenance.

Lease payments are not deductible in addition to the per-mile rate; they are included within the rate itself. However, parking fees and tolls incurred for business purposes can be deducted separately, even when using the standard mileage rate. If you choose this method for a leased car, you must use it for the entire lease period, including any renewals.

The actual expense method allows taxpayers to deduct the actual costs of operating the vehicle for business. This involves tracking and deducting all specific expenses, such as lease payments, fuel, maintenance, and insurance. Unlike purchased vehicles, leased cars do not involve depreciation deductions; instead, the lease payments are the primary write-off. A consideration for leased vehicles under this method is the “inclusion amount” rule, which reduces the deductible portion of lease payments for higher-priced leased cars.

Important Limitations and Record Keeping

When deducting leased car expenses, it is crucial to accurately allocate costs between business and personal use. If a vehicle is used for both purposes, only the business portion of the expenses is deductible. For example, if 60% of the total mileage is for business, then only 60% of the eligible expenses can be claimed. This proration ensures that taxpayers only deduct expenses directly related to their business activities.

The “lease inclusion amount” is a specific limitation that applies to leased vehicles under the actual expense method, particularly for those considered luxury cars. The IRS requires that a portion of the fair market value of higher-priced leased vehicles be included as income, which effectively reduces the deductible amount of the lease payments. This adjustment is designed to equalize the tax treatment between leased and purchased luxury vehicles, preventing taxpayers from deducting the full lease cost of an expensive car without limitation.

Meticulous record keeping is essential for substantiating any claimed car expense deductions. Taxpayers must maintain detailed records, including mileage logs that document the date, destination, purpose, and total mileage for each business trip. Additionally, receipts for all expenses, such as gas, oil, maintenance, and insurance, should be kept. These records are vital to meet IRS substantiation requirements and demonstrate the business use of the vehicle in the event of an audit.