Can You Section 179 a Leased Vehicle?

The Section 179 deduction allows businesses to expense the full cost of qualifying equipment rather than depreciating it over many years. This write-off can lower a company’s taxable income and improve cash flow. A common question for business owners is whether this benefit can be applied to vehicles they lease for business operations. The ability to claim the deduction for a leased vehicle depends on the tax code’s definition of ownership.

The Section 179 Ownership Requirement

The ability to claim a Section 179 deduction is tied to ownership of the property. To qualify, a business must acquire and hold the legal title to the asset during the tax year it is placed in service. This means the vehicle must be registered in the business’s name.

For a vehicle under a true lease agreement, the business does not hold the title. The leasing company retains legal ownership, while the business merely has the right to use the vehicle for a specified period in exchange for regular payments. Because the lessee does not own the vehicle, a vehicle under a true lease cannot be expensed using this deduction.

A primary condition is that the vehicle must be used more than 50% of the time for qualified business purposes. If business use drops to 50% or less in any year during the asset’s recovery period, a portion of the previously claimed deduction may be subject to recapture, meaning it must be added back to income.

Distinguishing a True Lease from a Purchase Agreement

The Internal Revenue Service (IRS) recognizes that not all agreements labeled as “leases” are true leases in substance. The economic reality of a transaction, rather than its name, dictates its tax treatment. An agreement may be structured as a lease but function as a conditional sales contract, which is a financed purchase. In these cases, the IRS will treat the business as the owner of the vehicle, potentially allowing for a Section 179 deduction.

To determine if an agreement is a lease or a conditional sale, the IRS examines if the contract gives the lessee the benefits and burdens of ownership. An agreement is likely a conditional sales contract if it includes the following terms:

• A portion of each payment is applied toward building equity in the vehicle.
• The title automatically passes to the business after a set number of payments are made.
• The total payments are substantially equivalent to the vehicle’s purchase price.
• The payments are significantly higher than the vehicle’s fair rental value.
• The business has the option to purchase the vehicle for a nominal amount at the end of the term.
• A designated interest factor is present within the payment structure.

If the terms of the agreement align with these characteristics, the business is considered the owner and may be eligible to claim the Section 179 deduction.

Deducting Business Expenses for a Leased Vehicle

When a vehicle is under a true lease, a business can still deduct the ordinary and necessary costs associated with using that vehicle for business. The primary deduction is for the lease payments themselves. A business can deduct the portion of its total annual lease payments that corresponds to its percentage of business use. For example, if a vehicle is used 80% for business, 80% of the total lease payments for the year can be deducted as a business expense.

This deduction for lease payments has limits for higher-priced vehicles. To create parity with the depreciation limits imposed on purchased luxury automobiles, the IRS requires lessees to reduce their lease deduction by an amount called the “lease inclusion amount.” The inclusion amount is determined annually by the IRS and is based on the fair market value of the vehicle on the first day of the lease.

The calculation requires the taxpayer to find the fair market value of their vehicle in the appropriate IRS table for the year the lease began. For instance, based on the tables for leases beginning in 2025, if a taxpayer leased a passenger automobile valued at $65,500, the inclusion amount for the first tax year of the lease would be $42. This amount is then prorated for the number of days in the lease term during that tax year and multiplied by the business-use percentage. This final figure is subtracted from the total deductible lease payments.

Beyond the lease payments, a business can also deduct other actual operating expenses. These include costs for gasoline, oil, maintenance, repairs, insurance, and registration fees. Just like the lease payments, these expenses must be prorated based on the percentage of business use. A taxpayer must choose between deducting these actual expenses or using the standard mileage rate; they cannot do both for a leased vehicle.