Yes, you can write off your car lease – if you use the vehicle for business and the use qualifies for a deduction. Sound complicated? It's not.
Just make sure you know the basics of deducting car lease payments and you'll be able to reduce your personal or business income tax liability each year. Work with a tax professional before you lease to find out if your use of the car qualifies you for a write-off and what the tax benefits of leasing a car might be to you or your business.
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What Is a Business Deduction?
When you deduct a business expense, you don't lower your taxes by that expense amount, you simply lower your taxable income. For example, if your business tax rate for a particular year ends up being 20 percent, if you have a $100,000 profit at the end of the year, you'll owe $20,000 in taxes.
If you can write off a $1,000 business expense, that doesn't mean you deduct it from your taxes owed, or pay only $19,000 in tax. It means you now have an extra $1,000 in expenses for the year and your profit is only $99,000. You now pay 20 percent of $99,000 ($19,800) instead of 20 percent of $100,000 ($20,000), so your $1,000 write-off is worth $200 in tax savings to you.
Leasing vs. Owning
It doesn't matter whether you own or lease your car when it comes to claiming a business deduction, as long as you use the car for qualifying business trips. Whether you or your business leases or owns a vehicle, it's an expense to the company. If you choose to deduct mileage, rather than claim actual expenses, you must use the mileage deduction method during the entire lease period of the vehicle, explains the IRS.
Read More: How Much Is The Standard Tax Deduction?
Who Can Deduct Lease Expenses?
If you are a contractor, gig worker or own your own business, you can write off business expenses. That includes the business use of your leased or owned vehicle.
If you are an employee of a business that requires you to use your car for business trips (for example, making weekly bank deposits or sales calls), you can no longer deduct your mileage or vehicle expense if your company does not reimburse you for your expenses or mileage. The Tax Cut & Jobs Act, which went into effect January 1, 2018, eliminated the deduction for unreimbursed expenses for employees. The TCJA remains in effect through 2025 – check to see if Congress renews this provision after that.
Qualifying Business Use
Some business use of your car doesn't qualify for a tax deduction. For example, if you drive to and from the same place of work each day, that's not considered a business trip – it's considered a commute and doesn't qualify. If you drive to the printers to drop off a brochure, then drive to pick up the finished copies, those two trips qualify.
Mileage vs. Other Costs
The mileage deduction for 2021 is 56 cents per mile, increasing to 58.5 cents in 2022. If you deduct your mileage, you cannot deduct other expenses related to paying for or operating your vehicle – the mileage rate covers all of that. This means you can't write off your lease or loan payments, gas, oil, air filter, tires, maintenance or repairs.
If you think your ownership and operating costs will be more than your mileage, you can choose to claim those "actual" expenses, instead. Check with a tax professional to learn how to do this correctly.
The IRS does not allow you to guesstimate your mileage amount at the end of the year. It requires you to keep written records of your trips. Keep a notebook or journal in your glove box or enter your trips into a paper or computer document at home or the office each day or week to keep accurate records.