Can I Write Off My Car Lease for Business Use?

Understanding the tax implications of business-related vehicle expenses is an important aspect for many individuals and businesses. When a vehicle is leased for business purposes, certain associated expenses may be deductible. These deductions aim to allow taxpayers to offset income with costs directly related to their trade or business operations. Navigating these rules requires attention to detail, as specific requirements and limitations apply to ensure compliance with tax regulations.

Eligibility for Deducting Lease Expenses

Individuals operating a trade or business can deduct ordinary and necessary expenses paid or incurred during the taxable year, as outlined in Internal Revenue Code (IRC) Section 162. Only the portion of the lease expense directly attributable to business use is deductible.

Determining what constitutes “business use” is key for claiming these deductions. Business use refers to travel directly related to your work, such as client visits, supply runs, or travel between different business locations. Commuting from your home to your primary place of work is considered personal use and is not deductible. Similarly, personal errands or vacation travel do not qualify as business use.

Eligibility to deduct these expenses extends to self-employed individuals, independent contractors, and business owners. For employees, the ability to deduct unreimbursed employee business expenses has been suspended. The Tax Cuts and Jobs Act (TCJA) of 2017 eliminated miscellaneous itemized deductions subject to the 2% adjusted gross income (AGI) limit for tax years 2018 through 2025. Therefore, most employees cannot claim deductions for car lease expenses, even if they use their personal leased vehicle for their employer’s business.

Calculating Your Car Lease Deduction

When deducting car lease expenses, taxpayers choose between two primary methods: the actual expense method or the standard mileage rate method. The choice of method can impact the complexity of record-keeping and the total deduction claimed.

Under the actual expense method, you deduct the actual costs incurred for the business use of your leased vehicle. These expenses can include:
Lease payments
Fuel
Oil
Maintenance
Repairs
Insurance premiums
Vehicle registration fees
Tire replacements

The total of these actual expenses is then multiplied by the business-use percentage to determine the deductible amount.

Alternatively, the standard mileage rate method offers a simplified way to calculate vehicle deductions without tracking every individual expense. This method allows you to deduct a set amount for each business mile driven. For vehicles leased for business, if you choose the standard mileage rate for the first year the vehicle is used for business, you must continue using this method for the entire lease period. The standard mileage rate for business use is periodically updated by the Internal Revenue Service (IRS); for 2024, the rate was 67 cents per mile. Taxpayers should verify the latest applicable rate for the current tax year.

Key Tax Rules for Leased Vehicles

Specific tax rules apply to leased vehicles, particularly concerning luxury vehicles. One significant adjustment is the “lease inclusion amount.” This rule prevents taxpayers from effectively deducting the full lease payment for luxury vehicles when they would face depreciation limits if they had purchased a similar vehicle. The IRS imposes annual limits on the depreciation deductions for purchased passenger automobiles.

The lease inclusion amount requires an income inclusion (or a reduction in the deductible lease expense) for leased luxury vehicles. This adjustment accounts for the fact that the full lease payment could otherwise allow a deduction greater than what would be permitted through depreciation on a purchased vehicle of similar value. The specific lease inclusion amount depends on the vehicle’s fair market value on the first day of the lease and the lease year. The IRS publishes tables, often found in Publication 463, that provide these specific amounts.

The intent of these rules is to ensure that the tax benefits for a leased luxury car do not exceed those for a purchased luxury car. Any lease inclusion amount, like other vehicle expenses, must be adjusted for personal use. Only the business-use portion of the lease inclusion amount is relevant when calculating your final deduction.

Maintaining Proper Records

Accurate and contemporaneous record-keeping is important for substantiating car lease deductions claimed for business use. The Internal Revenue Service (IRS) requires detailed documentation to support these expenses. Maintaining thorough records helps ensure compliance and provides evidence in case of an audit.

A mileage log is a key document, requiring specific details for each business trip. For every business journey, you should record the date, your destination, the business purpose of the trip, and the starting and ending mileage readings. Keeping these logs consistently, ideally at the time of the trip, strengthens the credibility of your deductions.

Beyond mileage, retain all receipts for actual expenses incurred. These include:
Fuel purchases
Oil changes
Routine maintenance
Repairs
Insurance payments
Vehicle registration fees
Tire replacements

The original lease agreement for the vehicle should also be kept, as it serves as primary documentation for the lease payments. All these documents collectively provide a comprehensive record to support your claimed deductions.