Tax advantages of leasing vs. buying a car Advertiser Disclosure Advertiser Disclosure We are an independent, advertising-supported comparison service. Our goal is to help you make better financial decisions by providing you with interactive financial calculators and tools as well as publishing objective and unique content. We also allow you to conduct your own research and compare information at no cost to help you make sound financial decisions. Bankrate has partnerships with issuers, including but not limited to American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Earn Money The products that are featured on this website are provided by companies that pay us. This compensation may impact how and when products appear on this website, for example for instance, the order in which they may be listed within the categories of listing and other categories, unless prohibited by law. Our mortgage home equity, mortgage and other home lending products. This compensation, however, does have no impact on the content we publish or the reviews that you see on this site. We do not contain the entire universe of businesses or financial deals that could be open to you. SHARE: andresr/Getty Images
4 min read Published June 14, 2022
Written by Mia Taylor Written by Contributing Writer Mia Taylor is a contributor to Bankrate and an award-winning journalist who has two decades of experience and worked as a staff reporter or contributor for some of the nation's leading newspapers and websites including The Atlanta Journal-Constitution, the San Diego Union-Tribune, TheStreet, MSN and Credit.com. Written by Rhys Subitch Edited by Auto loans editor Rhys has been writing and editing for Bankrate since late 2021. They are dedicated to helping readers gain the confidence to take control of their finances with clear, well-researched information that breaks down complicated topics into manageable bites. The Bankrate promise
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This compensation could affect the way, location and when products are displayed within the categories of listing and categories, unless it is prohibited by law. We also offer credit, mortgage and other home loan products. Other factors, such as our own rules for our website and whether the product is offered in your region or within your own personal credit score could also affect the manner in which products are featured on this site. Although we try to offer a wide range offers, Bankrate does not include details about every credit or financial product or service. If you're a business owner, you likely need to put more thought into whether to purchase or lease your vehicle as opposed to the typical driver. All the standard questions that you have to answer about whether to lease or purchase are relevant, however there's a second factor to consider -- namely, which are tax benefits? Tax deductions for vehicles used by businesses When you use a vehicle for business purposes There are two options allowed by the IRS to claim the expense on the federal tax form. You may use what's known as the normal mileage rate deduction, or opt to use the actual expense deduction. You can switch between standard expense and actual expenses from year to the year when you purchase a vehicle, but you must stay with what you first pick when leasing. Mileage deduction The standard mileage method allows you to declare the miles you drive by your company on your federal tax return. The IRS releases the standard mileage rate which will be utilized to calculate the tax-deductible costs of operating a car for business purposes each year. The rate for 2022 is 58.5 cents for every mile for business use. That means that if you travel 15,000 miles to support your business, you are able to claim a deduction of up to $8,775. Lease payments You can take the cost of monthly lease payments taking the expense deduction on your federal tax returns. The specific amount of the lease payment deduction allowed depends on the amount you use the vehicle exclusively for business. For example, if your monthly lease payment is $400 and the car is used 50 percent by business it is possible to claim $200 per month in expenses. This benefit is only available if you sign on to an ordinary lease. You are not able to get a federal tax deduction for lease payments made monthly if you take on an agreement to purchase the vehicle, which means you will own the vehicle at the time of contract expiration rather than needing to return the car to the dealer. Depreciation Only vehicles purchased qualify for depreciation deductions and only if the actual expense deduction is used. The method for determining the value of your vehicle's depreciation throughout the year is typically Modified Accelerated Cost Recovery System (MACRS). Much like the mileage deduction the deduction for depreciation changes each year. For 2021 the maximum depreciation you could deduct was $10,000, but there are options to increase the amount based on when the vehicle was placed in service. It is recommended to review the IRS to familiarize yourself with the ways you can reduce the value of your vehicles and other property as an owner of a business. Maintenance and operating expenses Actual costs also cover the deduction of any other expenses like oil and gas changes as well as tire repairs and purchases for your leased or purchased vehicle. If your vehicle needs urgent repairs or maintenance due to business use, keep careful track of the expenses. So, you'll know precisely what you paid for and the amount your business could reduce tax costs during tax season. The cost difference between the purchase and lease vehicles. The initial cost can be much lower when you lease a vehicle with the same brand model, year and year as when compared to purchasing it. For business owners you can use those savings to be redirected to other business needs and investments. If you are certain that you will remain within the lease conditions for wear-and-tear as well as the expected mileage, you could see that the less expensive payments open up more money for your business. If you are comparing the same vehicle in a lease and a buy, your monthly payments and the initial down payment could be lower for a lease. It is also possible to have lower expenses for maintenance if the lease covers the cost of routine services, such as oil replacement. Purchasing has advantages in the fact that you will eventually own the car, while leases have to end eventually -- and your company is left without equity. The cost of early termination when you have to terminate the contract early and excess mileage fees incurred if you go over the mileage limits can also add significant costs in the case of leases. Both options are subject to interest and other fees and, in the end, it depends on the way your company will require to utilize the vehicle. Is it better to lease or purchase a business vehicle? The tax advantages that could be derived from it are only one of the factors to consider for owners of businesses. In the end, a car purchase or lease is an enormous expense for your company and you should look at the problem from all angles before committing. Lease contracts usually limit the number of miles that a vehicle can be driven up to 10,000 or 20,000 miles per year. When you go beyond that limit, the lease may have a penalty of 10 to 50 cents per additional mile. If you're driving a fantastic amount for your business purchasing a car could be the right choice. Also, the car must be kept in good condition. If you fail to keep on your side of the agreement , or if you notice excess wear and tear on the vehicle at the time of return the car, you may face additional costs. Also, keep in your mind that if you continue to lease a car one after the other and you'll always be required to pay monthly car payments, unlike when you purchase a car and then own it completely. If you like having access to the newest cars with the most advanced technologies, leasing a vehicle can be a great way to achieve this, and allow you to get a brand new car every three or four years. Additionally, since lease payments tend to be cheaper than a conventional car loan and you can able to afford a higher-end vehicle. In the end, as with many aspects of running your business, there's no one-size-fits-all answer in determining if a lease or buying offers tax benefits. Consider how the vehicle will be used, as well as upfront costs, long-term costs and the possibility of additional charges in addition to the amount of deductions you could get before purchasing an automobile for your business. Discover more SHARE:
Written by Contributing Writer Mia Taylor is a contributor to Bankrate and an award-winning journalist who has two decades of experience and worked as a staff reporter or contributor for some of the nation's leading newspapers and websites including The Atlanta Journal-Constitution, the San Diego Union-Tribune, TheStreet, MSN and Credit.com. Written by Rhys Subitch Edited by Auto loans editor Rhys has been editing and writing for Bankrate since the end of 2021. They are passionate about helping readers gain the confidence to control their finances by providing concise, well-researched and well-studied content that breaks down complicated topics into manageable bites.
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