Can I Write Off My Business Lease Payment?

Businesses often lease assets like vehicles, equipment, or office space. These lease payments can offer significant tax deductions. Understanding how to deduct these payments can help reduce a business’s taxable income. The Internal Revenue Service (IRS) provides guidelines for deductible business lease expenses, helping businesses maximize eligible write-offs.

Understanding Business Lease Deductions

For a business lease payment to be deductible, it must meet the IRS criteria of being both “ordinary and necessary” for the trade or business. An ordinary expense is common and accepted in the industry, while a necessary expense is helpful and appropriate for the business’s operations. Only the portion of the lease payment directly attributable to business use is eligible for deduction.

Businesses of various structures can claim these deductions. Sole proprietors report these expenses on Schedule C of their personal tax return. Partnerships and LLCs generally deduct lease expenses on the entity’s tax return, allocating the write-off to partners or members based on ownership percentages. C-corporations deduct lease payments on their corporate tax returns (Form 1120).

Deducting Vehicle Lease Payments

Deducting vehicle lease payments involves specific considerations beyond the general “ordinary and necessary” rule. If a vehicle is used for both business and personal purposes, only the business-use portion of the lease payment is deductible. Businesses must maintain detailed records, such as mileage logs, to substantiate the business use percentage.

Internal Revenue Code Section 280F limits deductions for certain “listed property,” including passenger automobiles, to prevent excessive write-offs for luxury vehicles. For leased vehicles, these limitations apply through a “lease inclusion amount.” This amount, which taxpayers add back to their income, effectively reduces the deductible lease expense. This equalizes tax benefits with those who purchase similar vehicles. The lease inclusion amount depends on the vehicle’s fair market value at the time it is first leased and the year of the lease term. For example, for a passenger car first leased in 2025, a lease inclusion amount may apply if its fair market value exceeds $62,000.

The IRS publishes annual guidance outlining fair market value thresholds and corresponding lease inclusion amounts. These rules apply to passenger cars, SUVs, trucks, and vans, although specific thresholds may vary.

Deducting Other Business Lease Payments

Lease payments for other common business assets, such as equipment and real estate, are deductible as ordinary and necessary business expenses. This includes rent paid for office space, retail storefronts, or warehouses. For equipment, the leased item must be used directly in business operations to generate income.

The deductibility of these lease payments is more straightforward than for vehicles, as they do not involve the complex allocation rules or luxury limitations imposed by Internal Revenue Code Section 280F. If property, like an office or equipment, is used exclusively for business, the entire lease payment is deductible. If the property has mixed business and personal use, such as a home office, only the portion allocated to business activities is deductible. The IRS suggests methods for determining the business-use percentage, like comparing the area used for business to the total property area.

Operating Lease Versus Capital Lease

The tax treatment of a lease depends significantly on its classification as either an operating lease or a capital lease (also known as a finance lease). This distinction determines how the “write-off” occurs for tax purposes. For an operating lease, payments are treated as a rental expense and are fully deductible in the year they are incurred. The lessee expenses the monthly payments directly on their income statement.

In contrast, a capital lease is treated as a purchase for tax purposes, even if legally a lease. Under a capital lease, the business is considered to own the asset. Therefore, it cannot deduct lease payments directly as rent. Instead, the business generally deducts depreciation on the asset over its useful life and any associated interest expense incurred on the financing portion of the lease. The IRS looks at the substance of the transaction rather than just the label. An agreement may be considered a conditional sales contract (capital lease) if it transfers an equity interest to the lessee, includes a bargain purchase option, or if total payments are disproportionately large compared to the fair rental value.

Accounting rules for lease classification, such as ASC 842 under Generally Accepted Accounting Principles, are distinct from IRS tax rules. A lease classified as an operating lease for financial reporting might still be treated as a capital lease for tax purposes, or vice versa. The tax classification dictates whether the business deducts lease payments as rent or claims depreciation and interest expenses.

Maintaining Records for Lease Deductions

Accurate record-keeping is fundamental for substantiating all business deductions, including lease payments. Businesses must maintain copies of the lease agreement, outlining terms and payment schedules. Records of all lease payments made, such as canceled checks, bank statements, or payment receipts, are also necessary.

For leased vehicles, detailed mileage logs are crucial to support the business use percentage claimed for deductions. These logs should document the date, mileage, destination, and purpose of each business trip. The IRS requires taxpayers to prove the validity of their deductions in an audit, placing the burden of proof on the taxpayer. Retain tax records, including lease documentation, for at least three years after filing the tax return. Maintaining organized records by year and expense category facilitates easy retrieval and review, ensuring compliance and readiness for tax inquiries.