Can You Depreciate a Leased Vehicle?

When considering a vehicle for business use, a common question is whether a leased vehicle can be depreciated for tax purposes. Generally, you cannot depreciate a leased vehicle because you do not own it. This article explains why depreciation is not allowed for leased assets and details the tax benefits available for leased business vehicles.

Understanding Depreciation and Vehicle Ownership

Depreciation is an accounting method used to allocate the cost of a tangible asset over its useful life, allowing businesses to recover the cost by deducting a portion each year. It applies to assets a taxpayer owns and uses in their trade or business or for income production.

Ownership is a prerequisite for claiming depreciation deductions. When a business purchases a vehicle, it holds the title, making it eligible for depreciation. In contrast, leasing a vehicle is akin to renting; the lessee does not hold title. The leasing company retains ownership and is the entity that can claim depreciation.

Deductible Expenses for Leased Business Vehicles

While depreciation is not an option for leased vehicles, businesses can claim tax deductions related to their use. The primary deduction available is for the actual lease payments made, provided the vehicle is used for business purposes. If the vehicle is used for both business and personal activities, only the portion of the lease payments attributable to business use is deductible.

Beyond lease payments, many other operating expenses associated with the business use of a leased vehicle are also deductible. These can include costs such as fuel, routine maintenance, and repairs. Insurance premiums, vehicle registration fees, and tolls and parking fees incurred for business-related travel are eligible deductions. To claim these expenses, they must be considered “ordinary and necessary” for the operation of the business.

Specific Tax Considerations for Leased Vehicles

The percentage of business use is a significant factor in determining the deductible amount for a leased vehicle, as taxpayers can only deduct the portion of expenses that corresponds to its business use. Accurate record-keeping, such as maintaining a detailed mileage log, is important to substantiate the business use percentage and support claimed deductions. This log should include the date, destination, business purpose, and miles driven for each business trip.

For certain higher-value leased vehicles, the IRS implements a rule known as the “lease inclusion amount.” This rule requires a reduction in the deductible portion of lease payments, effectively preventing taxpayers from gaining a larger tax benefit by leasing an expensive vehicle than they would if they had purchased it. The lease inclusion amount is a fixed dollar figure, determined annually by the IRS based on the vehicle’s fair market value at the beginning of the lease. This mechanism helps equalize the tax treatment between buying and leasing luxury automobiles.

The lease inclusion amount does not increase taxable income; rather, it reduces the deductible portion of the lease payment. The IRS publishes tables specifying these amounts, which vary based on the vehicle’s value and lease start year. Accurate records of all vehicle-related expenses and mileage are important for supporting claimed deductions, whether the vehicle is leased or owned.