Can I Write Off Car Lease Payments?

Self-employed individuals and business owners often inquire about deducting car lease payments for tax purposes. The rules for these deductions are detailed and depend significantly on how the vehicle is used. Understanding these regulations is important for accurately reporting expenses and maximizing potential tax benefits.

Determining Eligibility for Deduction

The primary requirement for deducting car lease payments is that the vehicle must be used for business purposes. This deduction applies to self-employed individuals, independent contractors, and business owners who use a vehicle in their trade or business. Employees generally cannot deduct unreimbursed employee business expenses due to the Tax Cuts and Jobs Act of 2017, which suspended these deductions for most workers from 2018 to 2025.

Business use includes activities such as traveling between job sites, visiting clients, or delivering goods and services. Conversely, commuting from home to a regular place of business is considered personal use and is not deductible. Similarly, personal travel or errands do not qualify for a deduction. Only the portion of the vehicle’s use directly related to business activities can be considered for tax purposes.

Identifying Deductible Expenses for Leased Vehicles

Once business use is established, several expenses related to a leased vehicle are deductible. The lease payment itself is the most direct expense, deductible under the actual expense method. This allows businesses to write off a portion of their monthly lease payments, directly reducing taxable income.

Beyond lease payments, other operating expenses associated with the vehicle’s business use are also deductible. These include fuel, oil, repairs, maintenance, insurance premiums, and registration fees. Sales tax paid on the lease can also be deducted as a business expense.

Calculating the Business Use Percentage

Determining the deductible amount for leased vehicle expenses requires calculating the business use percentage. This is achieved by dividing the total business miles driven by the total miles driven for the year. For instance, if a vehicle travels 10,000 total miles in a year, and 6,000 of those miles are for business, the business use percentage is 60%.

Accurate mileage tracking is essential for this calculation. A detailed mileage log should include the date of each trip, the destination, the business purpose, and the total miles driven for that trip. Odometer readings at the start and end of the year are also important to substantiate the total miles. Once the business use percentage is determined, it is applied to the total amount of all eligible vehicle expenses, including lease payments, fuel, and insurance, to arrive at the deductible amount.

Understanding Specific Deduction Limitations

Even after applying the business use percentage, specific IRS rules may limit the deduction for leased vehicles. A significant limitation is the “lease inclusion amount,” which applies to vehicles with a fair market value above a certain threshold. For a vehicle first leased in 2024, if its fair market value exceeds $62,000, a lease inclusion amount must be added back to gross income, effectively reducing the deduction.

The purpose of this inclusion amount is to prevent taxpayers from deducting the full cost of a luxury vehicle, aligning the tax treatment of leased luxury vehicles with that of purchased ones. The exact inclusion amount depends on the vehicle’s fair market value, the business ownership percentage, and the lease term. These amounts are published annually by the IRS in tables.

Maintaining Necessary Records

Meticulous record-keeping is essential for substantiating car lease payment deductions and related expenses. In an IRS audit, comprehensive documentation is required to prove both the business use and the amount of expenses claimed. The IRS mandates “contemporaneous” record-keeping, meaning entries should be made at or near the time of the business activity.

Key records to maintain include a detailed mileage log documenting the date, destination, purpose, and business/personal miles for each trip. Taxpayers should also keep all lease agreements and receipts for vehicle-related expenses such as fuel, oil, repairs, maintenance, and insurance premiums. Bank statements or credit card statements showing these payments provide further evidence to support claimed deductions.