Tax advantages of leasing vs. buying a car Advertiser Disclosure Advertiser Disclosure We are an independent, advertising-supported comparison service. Our aim is to assist you make better financial choices by providing you with interactive tools and financial calculators, publishing original and objective content, by enabling users to conduct research and compare information at no cost to help you make informed financial decisions. Bankrate has partnerships with issuers such as, but not restricted to, American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Earn Money The deals that are advertised on this website are provided by companies that pay us. This compensation can affect the way and when products are featured on the site, such as such things as the order in which they appear within the listing categories and other categories, unless prohibited by law. Our mortgage, home equity and other products for home loans. However, this compensation will not influence the information we provide, or the reviews that you see on this site. We do not contain the vast array of companies or financial offers that may 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 editing and writing for Bankrate since late 2021. They are committed to helping readers gain confidence to take control of their finances by providing precise, well-researched and well-researched data that breaks down otherwise complex issues into digestible chunks. The Bankrate promise
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We receive compensation for the placement of sponsored products or services, or through you clicking certain links posted on our website. So, this compensation can affect the way, location and when products are listed, except where prohibited by law for our credit, mortgage and other home loan products. Other factors, like our own website rules and whether the product is available within your region or within your personal credit score can also impact 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 are a business owner, you’ll probably need to think more thought into the decision to purchase or lease your car as opposed to the typical driver. All the standard questions to consider whether to lease or buy come into play, but there’s an additional factor — namely, which are tax advantages? Tax deductions for vehicles used by businesses If you are using a vehicle for business purposes there are two methods accepted by the IRS to claim the expense on the federal tax form. You can use what’s referred to as the standard mileage rate deduction, or you can choose to take advantage of the actual expenses deduction. You can switch between standard expense and actual expense from year to year for a purchased vehicle but you must stick with what you first pick when leasing. Mileage deduction : The standard mileage approach allows you to be able to claim the miles you’ve driven for your business on your federal tax returns. The IRS releases the standard mileage rate which will be utilized to determine the tax-deductible costs of operating a car for business purposes every year. For 2022, the rate of 58.5 cents per mile for business purposes. This means if you drive 15,000 miles for your business, you are able to deduct a total of $8,775. Lease payments You may be able to deduct the expense of monthly lease payments by taking the expense deduction you claim on those federal tax return. The exact amount of allowance for lease payments is contingent on the amount you use the vehicle exclusively for business. For example, if the monthly lease payment is $400 and the vehicle is used at least 50 percent for business you are able to deduct $200 per month to cover expenses. This benefit is only available when you sign a standard lease. You cannot claim a federal tax deduction on monthly lease payments when you sign a lease-to-own contract, meaning you will own the vehicle after the contract ends instead of needing to return the car to the dealer. Depreciation Only cars purchased are eligible for depreciation deductions and only when you actually use the deduction taken into consideration. The method used to determine the amount your car has depreciated throughout the year is typically Modified Accelerated Cost Recovery System (MACRS). Similar to the mileage deduction, depreciation deduction changes every year. For 2021 the maximum amount you could deduct was $10,200 however, there are ways to increase the amount depending on the time when the vehicle entered service. You should review by the IRS to familiarize yourself with the methods you can depreciate your vehicle and other assets as a business owner. Operating and maintenance expenses cost rules also allow for 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 for business reasons be sure to keep a detailed track of the expenses. In this way, you’ll be aware of precisely what you paid for — and how much your company can reduce tax costs during tax season. The cost difference between the purchase and lease vehicles The up-front costs can be much lower when leasing a vehicle with the same brand model, year and year as compared to buying it. For business owners you can use those savings to be used to fund investment and other needs for your business. Provided you know you will stay within the lease terms for wear and tear and expected mileage, you may see that the less expensive payments open up more money for your business. If you are comparing the same vehicle as a lease versus a purchase, the monthly payments and your initial deposit may be less expensive when you lease. It is also possible to have lower maintenance costs if your lease includes routine maintenance services, for example, oil adjustments. Purchasing wins out in the fact that you will eventually own the vehicle and leases must end eventually — and your business is left without equity. The cost of early termination when you want to terminate the lease earlier and the excess mileage fees incurred if you exceed the limits on mileage could cause significant expenses with leases. Both options are subject to additional fees and interest and, in the end, it depends on what your company’s needs to use the vehicle. Is it better to lease or purchase a business vehicle? The tax advantages that could be derived from it are just one aspect that business proprietors must consider. Ultimately, a vehicle purchase or lease is a big expense for your business and you should take a look at the issue from all angles before committing. Lease agreements typically restrict the amount of miles a car can be driven up to 10,000 or 20,000 miles per year. When you go beyond this limit, the lease may have a penalty of 10 to 50 cents for each additional mile. If you’re driving a fantastic amount for your business purchasing a car could be the better move. also require that the vehicle be kept in good condition. If you don’t keep on your side of the agreement , or if you notice excess wear and tear to the vehicle when you return it you could face additional costs. It’s important to keep in mind that if you continually lease one vehicle after another it will be a constant monthly car payments, unlike the case when you buy a car and eventually own the car completely. On the upside, if you want to have access to the latest car models with the latest technology features available in the market, leasing a car can be a great way to achieve this, and allow you to purchase a new vehicle every three or four years. Furthermore, since lease payments are generally lower than a traditional car loan, you may be able to afford a higher-end vehicle. The bottom line is that, like many aspects of running your business, there’s not a one-size-fits-all solution in determining if leasing or buying a vehicle offers tax benefits. Think about how the car will be used, upfront costs, long-term costs and any additional fees that could be incurred and the variety of deductions that you may receive before investing in the right vehicle for your business. Find out more about 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. Edited by Rhys Subitch Edited by Auto loans editor Rhys has been writing and editing for Bankrate from late 2021. They are dedicated to helping readers gain the confidence to manage their finances through providing concise, well-researched and well-studied content that breaks down otherwise complex subjects into digestible chunks.
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