Can You Write Off a Car Lease as a Tax Deduction?
Understand the strategic considerations for deducting car lease expenses on your taxes. Optimize your business write-offs with expert guidance.
Tax deductions for business expenses can reduce taxable income, and a car lease may qualify. Businesses and self-employed individuals often use vehicles for operational needs, making associated costs deductible.
Qualifying for a Car Lease Tax Deduction
To deduct car lease expenses, the vehicle’s use must be considered “ordinary and necessary” for your trade or business. An ordinary expense is common in your industry; a necessary expense is helpful for your business. Only the portion of the lease payment directly attributable to business use is deductible.
Self-employed individuals and small business owners are eligible to claim this deduction. If a vehicle is used for both business and personal purposes, you must allocate expenses based on the percentage of business use. For instance, if a car is used 70% for business, only 70% of lease payments and associated costs are deductible. Commuting between your home and a regular place of business is considered personal use and is not deductible. However, travel between multiple business locations or from your home to a temporary work location can qualify as business use.
Methods for Calculating Your Deduction
There are two primary methods for calculating your car lease deduction: the actual expense method and the standard mileage rate method. You must choose one method for a particular vehicle, and that choice may have implications for future tax years.
Actual Expense Method
The actual expense method allows you to deduct the business portion of all operating costs for your leased vehicle. These expenses include lease payments, fuel, oil, repairs, maintenance, insurance premiums, and vehicle registration fees. Garage rent, tires, and interest on a car loan (if applicable to the business portion) are also included.
A consideration for leased vehicles under the actual expense method is the “lease inclusion amount.” This rule applies to higher-value leased vehicles, preventing a tax advantage from leasing luxury vehicles over purchasing them. If the fair market value of a passenger car leased in 2024 exceeds $62,000, or an SUV, truck, or van exceeds $64,000, you must add a lease inclusion amount back into your gross income, which effectively reduces your deduction. The IRS publishes tables annually to determine this inclusion amount, which depends on the vehicle’s fair market value and the year the lease began.
Standard Mileage Rate Method
The standard mileage rate method offers a simpler deduction calculation by multiplying your business miles driven by a set rate. For 2024, the standard business mileage rate is 67 cents per mile. This rate covers operating costs, including lease payments, depreciation, fuel, maintenance, and insurance.
When using the standard mileage rate, you cannot also deduct actual expenses: gas, oil, repairs, or lease payments for the same vehicle. However, you can still deduct business-related parking fees and tolls in addition to the standard mileage rate. If you choose the standard mileage rate for a leased vehicle, you must use this method for the entire lease period.
Necessary Documentation and Recordkeeping
Maintaining accurate records is important for your car lease deductions. The IRS requires documentation to support all claimed business expenses. Without adequate records, your deductions may be disallowed upon audit.
A mileage log is a primary record for both methods, especially to establish the business use percentage. This log should include the date of each trip, the destination, the business purpose, and the odometer readings at the beginning and end of the year. Keeping track of total miles driven, alongside business miles, helps accurately calculate the business use percentage.
For the actual expense method, you must retain all receipts and invoices for expenses: lease payments, fuel, maintenance, and insurance. These records provide proof of cost and identify the vehicle for the expense. Also keep copies of your lease agreement and proof of lease payments.
Reporting Your Car Lease Deduction
Once you calculate your car lease deduction, report it on the appropriate tax form. The specific form depends on your business structure. Sole proprietors and single-member LLCs report vehicle expenses on Schedule C (Form 1040), Profit or Loss From Business. On Schedule C, car and truck expenses are reported on Line 9. If using the actual expense method, lease payments might be reported on Line 20a, while other operating expenses like gas and repairs are on Line 9.
Partnerships file Form 1065, U.S. Return of Partnership Income. Vehicle expenses for a partnership-owned vehicle are included in “Other deductions” on Form 1065. If a partner uses their personal vehicle for partnership business and is reimbursed, the partnership can deduct the reimbursement. Corporations (C-Corps) file Form 1120, U.S. Corporation Income Tax Return, and S-Corps file Form 1120-S, U.S. Income Tax Return for an S Corporation. Vehicle expenses for company-owned vehicles are reported as an operating expense on these forms, within the “Deductions” section. Accurate reporting on these forms, supported by thorough documentation, helps ensure tax compliance.