Should I Lease a Car Through My Business?

Leasing a car through a business involves a contractual agreement where a business entity makes regular payments for the use of a vehicle over a set period, rather than purchasing it outright. This arrangement offers operational flexibility and different financial implications compared to vehicle ownership.

Tax Implications of Leasing for Business

Leasing a vehicle for business purposes provides tax advantages through the deduction of lease payments. If a leased vehicle is used exclusively for business, the full amount of the lease payments can be deducted. When used for both business and personal travel, only the business portion of the lease payment is deductible. This requires clear separation of business and personal mileage.

The Internal Revenue Service (IRS) offers two methods for deducting vehicle expenses: the standard mileage rate and the actual expense method. For 2025, the standard mileage rate is 70 cents per business mile. If a business chooses the standard mileage rate for a leased vehicle, that method must be used for the entire lease term, including any renewals. This rate includes costs such as depreciation, fuel, oil, and maintenance, simplifying record-keeping.

The actual expense method allows for the deduction of specific costs incurred in operating the vehicle for business. These expenses can include fuel, oil, repairs, tires, insurance premiums, registration fees, and lease payments. Detailed records of all vehicle-related expenditures are necessary for this method. This approach can yield a larger deduction if actual operating costs are high.

When using the actual expense method for a leased vehicle, only the business-related portion of the lease payment is deductible. For higher-value leased vehicles, the IRS implements a “lease inclusion amount.” This inclusion amount, which applies if the vehicle’s fair market value exceeds a certain threshold (e.g., $62,000 for passenger cars leased in 2025), reduces the deductible lease expense. This adjustment aims to equalize the tax benefits between leasing and purchasing luxury vehicles.

Other vehicle-related expenses are also deductible. These include tolls and parking fees incurred for business travel, regardless of the chosen deduction method. Sales tax paid on a leased vehicle can also be deducted. For leased vehicles, sales tax is applied to monthly lease payments, allowing for a deduction of the business portion of this tax over the lease term.

Accounting Treatment of Leased Business Vehicles

The accounting treatment of leased vehicles for a business is guided by specific financial reporting standards, primarily ASC 842 in the United States. This standard changed how leases are recorded on a company’s financial statements. Under ASC 842, nearly all leases longer than 12 months must be recognized on the balance sheet, impacting both assets and liabilities.

Leases are classified into two categories: operating leases and finance leases (formerly known as capital leases). A finance lease is treated much like an asset purchase, where the lessee assumes the risks and rewards of ownership. This type of lease requires the recognition of a “right-of-use” (ROU) asset and a corresponding lease liability on the balance sheet.

For finance leases, expenses are recognized separately as amortization of the ROU asset and interest expense on the lease liability. This results in higher expenses in the earlier years of the lease term. The asset and liability are recorded at the present value of the lease payments.

An operating lease, while still requiring an ROU asset and lease liability on the balance sheet under ASC 842, is accounted for differently on the income statement. Lease payments for operating leases are recognized as a single, straight-line lease expense over the lease term, meaning the expense is spread evenly throughout the lease period.

The primary distinction in financial statement presentation between these two lease types lies in the income statement. Finance leases show separate interest and amortization expenses, while operating leases show a single lease expense. Both lease types will increase a company’s reported assets and liabilities on the balance sheet, which can influence financial ratios and debt covenants.

Key Considerations When Deciding to Lease

Deciding whether to lease a car for business involves evaluating several factors. A primary consideration is the business’s cash flow. Leasing requires a lower initial outlay compared to purchasing a vehicle, which can preserve capital for other business operations. Monthly lease payments are predictable, aiding in budget management.

The expected mileage and usage patterns of the vehicle are important. Lease agreements come with annual mileage limits, commonly ranging from 10,000 to 15,000 miles per year. Exceeding these limits can result in significant per-mile penalties at the end of the lease term, ranging from $0.15 to $0.30 per mile. Businesses with high mileage needs might find a lease less economical due to these overage charges.

The desired vehicle type and its relevance to business operations play a role. A vehicle that aligns with the company’s image or specific operational requirements, such as cargo capacity or client transport, should be chosen carefully. The length of a lease term, often between two and five years, allows businesses to regularly update their fleet with newer models that may offer better fuel efficiency or advanced technology.

Comparing leasing to purchasing involves considering flexibility and ownership. Leasing offers the flexibility of returning the vehicle at the end of the term, avoiding the depreciation risk and the process of selling a used asset. Purchasing provides full ownership and the ability to customize the vehicle without lease restrictions, eventually leading to no monthly payments once the loan is satisfied. However, purchasing also entails the responsibility for the vehicle’s residual value and maintenance beyond warranty periods.

Maintaining Records for Business Vehicle Leases

Maintaining records is important for any business leasing a vehicle, ensuring compliance with tax regulations and accurate financial reporting. These records are necessary to substantiate deductions and provide a clear audit trail. The IRS requires detailed documentation for vehicle expenses, which can be maintained in physical or digital formats.

Key documents to retain include:
The original lease agreement
All payment receipts
Records of any capitalized cost reduction or security deposits
Receipts for vehicle-related expenses such as fuel, maintenance, repairs, and insurance

A mileage log is a key record, which must clearly distinguish between business and personal use. For each business trip, the log should include the date, the starting point and destination, the purpose of the trip, and the total miles driven. Recording odometer readings at the beginning and end of each year is also important. This detailed tracking is necessary, as only the business portion of expenses is deductible.

The IRS prefers that mileage logs be kept contemporaneously, meaning at or near the time of the trip. While manual logs or spreadsheets are acceptable, many businesses use mileage tracking applications to automate this process, improving accuracy and efficiency. These applications can help categorize trips and generate reports for tax purposes. Records should be kept for at least three years from the tax return filing date, or longer if depreciation was claimed.