Tax advantages of leasing vs. buying a car Advertiser Disclosure Advertiser Disclosure We are an independent, advertising-supported comparison service. Our mission is to help you make better financial choices by offering you interactive financial calculators and tools, publishing original and objective content, by enabling users to conduct research and compare information for free – so that you can make informed financial decisions. Bankrate has agreements with issuers, including but not limited to, American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Earn Profit The offers that appear on this website come from companies who pay us. This compensation could affect how and where products appear on this site, including, for example, the order in which they be listed within the categories of listing and other categories, unless prohibited by law for our mortgage or home equity products, as well as other home loan products. However, this compensation will affect the information we provide, or the reviews you read on this site. We do not cover the universe of companies or financial offers that may be accessible 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. Edited by Rhys Subitch Edited by Auto loans editor Rhys has been editing and writing for Bankrate since the end of 2021. They are dedicated to helping readers gain the confidence to take control of their finances with precise, well-researched and well-researched data that breaks down complex topics into manageable bites. The Bankrate guarantee
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We are compensated in exchange for the promotion of sponsored goods andservices or through you clicking certain links posted on our website. Therefore, this compensation may impact how, where and in what order items appear within listing categories and categories, unless it is prohibited by law. We also offer loan products, such as mortgages and home equity and other home loan products. Other factors, such as our own rules for our website and whether or not a product is available in the area you reside in or is within your self-selected credit score range could also affect the manner in which products are featured on this website. Although we try to offer the most diverse selection of products, Bankrate does not include specific information on every financial or credit product or service. If you’re a business owner, you’ll likely have to give more thought into whether you should purchase or lease your car than the average motorist. There are a myriad of questions to ask whether you should lease or buy come into play, but there’s an additional factor which is: what are the tax benefits? Tax deductions on business vehicles If you are using a vehicle for business purposes there are two methods that are permitted to you by IRS to deduct the expense on the federal tax form. You may use what’s known as the normal mileage deduction, or decide to utilize the deduction for actual expenses. You can switch between standard expense and actual expenses from year to an year with a car you have purchased however, you have to stick to the first option you select when leasing. Mileage deduction The standard mileage method allows you to claim miles driven for your business on your federal tax returns. The IRS sets the standard mileage rate that is used to determine the tax-deductible costs of operating a car business use every year. In 2022, the standard mileage rate will be 58.5 cents for every mile driven for business use. That means that if you travel 15,000 miles for your business, you can deduct a total of $8,775. Lease payments You can deduct the cost of lease payments per month using the actual expense deduction in the federal taxes you file. The exact amount of allowance for lease payments is contingent on the amount of time you drive the car exclusively for business. If, for instance, your monthly lease payment is $400 and your vehicle is used at least 50 percent of the time for business you are able to deduct $200 per month to cover expenses. These benefits are only available when you sign on to an ordinary lease. You are not able to claim a tax deduction from the federal government for monthly lease payments if you take on the lease-to-own option, which means you’ll own the car after the contract ends rather than needing to return the car back to the dealership. Depreciation Only purchased vehicles qualify for the depreciation deduction and only if an actual deduction for expenses is used. The method used to determine the amount your car has depreciated throughout the year is typically Modified Accelerated Cost Recovery System (MACRS). Much like the mileage deduction depreciation deduction changes every year. The deduction for 2021 was highest amount you could deduct was $10,000 There are alternatives to increase this amount depending on the time when the vehicle was put into service. You should review by the IRS to become familiar with the methods you can reduce the value of your vehicles and other property as the owner of a business. Operating and maintenance costs Actual expense rules also include the deduction of other expenses like gas, oil changes as well as tire repairs and purchases for your leased or purchased vehicle. If your vehicle needs urgent repairs or maintenance because of business-related use make sure you keep a meticulous record of it. So, you’ll know the exact amount you spent and how much your company can save during tax season. The cost difference between purchased and leased vehicles. The initial cost can be much lower when you lease a vehicle of the same make, model and year 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 remain within the lease conditions for wear-and-tear as well as expected mileage, you may see that the less expensive payments open up more cash to your business. If you are comparing the same vehicle in a lease and a purchase, the monthly payments as well as your initial deposit could be less expensive for a lease. You may also have reduced expenses for maintenance if the lease covers regular maintenance, like oil adjustments. Purchasing wins out when it comes to the fact that you will eventually own the vehicle and leases must end eventually — and your business is left with no equity. Costs for early termination if you want to terminate the lease early, and excessive mileage fees charged if you go over the limit of mileage can add significant costs in the case of leases. Both options are subject to interest and other fees, so ultimately, it is dependent on what your company’s needs to make use of the vehicle. Is it better to either lease or buy a company vehicle? Tax benefits could be only one of the factors that business proprietors must consider. 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 agreements typically limit the number of miles that a vehicle can be driven up to 10,000 or 20,000 miles annually. When you go beyond that limit, the lease may be subject to a fine of between 10 and 50 cents per additional mile. If you’re driving a fantastic deal for your business, buying a car may be the better move. Also, the car must is kept in good working order. If you fail to meet up with the agreement or if there’s an excessive amount of wear on the car after you return it, there may be additional fees. Also, keep in your mind that if you continue to lease one car after another it will be a constant monthly payments for your car, in contrast to when you purchase a vehicle and later own the vehicle in full. On the upside, if you are interested in having access to the most recent automobiles with the latest technology features available and available, leasing a car could be a way to do this, which allows you to purchase a new car every three years or so. Additionally, since lease payments tend to be lower than a traditional car loan, you may be capable of affording a more expensive vehicle. The bottom line As with all aspects of running your business, there’s not a one size fits all answer when it comes to if leasing or purchasing a car is more tax-efficient. Consider how the vehicle will be used, as well as upfront costs, long-term expenses and potential added fees and the variety of deductions you could receive before investing in the right vehicle 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. The article was edited by Rhys Subitch Edited by Auto loans editor Rhys has been editing and writing for Bankrate from late 2021. They are dedicated to helping readers gain confidence to take control of their finances through providing precise, well-studied information that breaks down otherwise complex subjects into digestible chunks.
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