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Why are so many people leasing their business vehicles?
Almost everyone shopping for a new car or truck asks this question. If the vehicle is going to be used for business most of the time, the advantages of leasing can far outweigh purchasing, not only in tax benefits, but also in improved cash flow and lower out-of-pocket business expenses.
Click here to learn more about Leasing vs. Buying
By leasing, many businesses have found they can…
- Save money with less initial cash outlay
- Improve cash flow because of lower monthly payments
- Be eligible for greater tax deductions and benefits
- Maintain a successful and professional image by driving a new vehicle more often
- Schedule vehicle deliveries to match cash availability
- Take advantage of available manufacturer's leasing incentives
- Eliminate resale risks or trade-in hassles
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How do I know if leasing is right for my business use?
Leasing can be right for you if…
- You use your vehicle more than 50% of the time for business
- You wish to pay for the portion of the vehicle you expect to use, rather than paying for the entire vehicle
- You use one or more vehicles specifically for business use
- You want to improve your cash flow and lower your out-of-pocket business expenses
- You want to take advantage of greater tax deductions
- See also Leasing vs. Buying
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What part of my lease costs can I deduct from my business or personal taxes?
If you use your vehicle more than 50% of the time for business, you can realize greater tax saving through leasing...
- You're allowed to deduct the part of your lease payment that represents your business use of the vehicle. For example, if 70% of your driving is business related, you can deduct 70% of your monthly lease payment. But, if you purchase the vehicle, federally determined depreciation limits apply, and your tax deduction may be less.
- Leasing is even more advantageous for those who prefer more expensive vehicles, because the tax deduction may be greater than when purchasing the same vehicle. When leasing, a percentage of your monthly lease payment is deductible, no matter how high the payment is. When purchasing a vehicle, however, your deduction would be limited to a federally determined maximum allowance, whether your vehicle costs $16,000 or $35,000.
- Although it doesn't directly affect your allowable tax deduction, "income inclusion" is an approximation by the IRS to make the tax benefits of leasing and purchasing more equitable. Income inclusion is only necessary as it relates to the business use of a leased vehicle. Income inclusion amounts are determined annually by the IRS, and after adjustments, are added to your taxable income. I provide my employees with leased vehicles.
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Can I still take advantage of the tax benefits?
Yes. In fact, when the taxpayer is the lessee, as in your case, there is an optional step called "curing." Curing means you can deduct the entire amount of the lease payments-even the portion allowed for personal use of the vehicle. The personal use of the company vehicle is considered a "fringe benefit" and given a value by the IRS. After this value is "cured," you can deduct the entire lease payment.
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How can I learn more about tax benefits of leasing?
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What if I expect to drive more business miles than what is allowed in my lease?
You can arrange for additional miles at the beginning of your lease agreement. You'll pay less by purchasing extra miles up front rather than at lease end. In addition to paying less for extra miles, the prearranged mileage cost is also included in your monthly lease payment, a portion of which is tax deductible. Leasing your vehicle can result in greater tax deductions than if purchased.
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What might I pay at the beginning of the lease?
- Your first monthly payment
- A refundable security deposit or your last monthly payment
- Other fees for licenses, registration and title
- A capitalized cost reduction (like a down payment)
- An acquisition fee (also called a processing or assignment fee)
- Freight or destination charges
- State or local taxes
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What must I pay during the lease?
- Your monthly payment
- Any additional taxes not included in the payment such as sales, use and personal property taxes
- Insurance premiums
- Ongoing maintenance costs
- Any fees for late payment
- Safety and emissions inspections
- Traffic tickets
- If you end your lease early, you may have to pay substantial early termination charges
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If I don't buy the vehicle at the end of the lease what do I pay?
- A disposition fee
- Charges for excess miles and excess wear and tear
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Can I compare different lease offers and negotiate some terms?
Yes. Consider…
- The agreed-upon value of the vehicle--a lower value can reduce your monthly payment
- Up-front payments, including the capitalized cost reduction
- The length of the lease
- The monthly lease payment
- Any end-of-lease fees and charges
- The mileage allowed and per-mile charges for excess miles
- The option to purchase either at lease end or earlier
- Whether you lease includes gap coverage, which protects you if the vehicle is stolen or totaled in an accident
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When I lease my vehicle what are my rights?
You have the right to…
- Use it for an agreed-upon number of months and miles
- Turn it in at lease end, pay any end-of-lease fees and charges and "walk away"
- Buy the vehicle if you have a purchase option
- Take advantage of any warranties, recalls, or other services that apply to the vehicle
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When I lease my vehicle what are my responsibilities?
You may be responsible for…
- Excess mileage charges when you return the vehicle. Your lease agreement will tell you how many miles you can drive before you must pay for extra miles and how much the per-mile charge will be.
- Excess wear charges when you return the vehicle. The standards for excess wear and tear, such as body damage or worn tires, are in your lease agreement.
- Substantial payments if you end the lease early. The earlier you end the lease, the greater these charges are likely to be.
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