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 choices by providing you with interactive financial calculators and tools as well as publishing objective and unique content. This allows you to conduct your own research and compare data for free to help you make informed financial decisions. Bankrate has partnerships with issuers including, 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 come from companies who pay us. This compensation could affect how and when products appear on this website, for example such things as the sequence in which they appear in the listing categories in the event that they are not permitted by law. This applies to our mortgage or home equity products, as well as other home lending products. This compensation, however, does affect the content we publish or the reviews that you read on this site. We do not contain the vast array 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. 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 confidence to control their finances with clear, well-researched information that breaks down otherwise complex topics into manageable bites. The Bankrate promises
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This compensation could influence the manner, place and when products are listed in the event that they are not permitted by law. We also offer credit, mortgage, and other home loan products. Other factors, such as our own website rules and whether a product is available in your area or at your own personal credit score can also impact the way and place products are listed on this site. While we strive to provide an array of offers, Bankrate does not include specific information on every financial or credit product or service. As a business owner you likely need to put more thought into whether to purchase or lease your vehicle than the average driver. All the standard questions that you have to answer about whether to lease or buy come into play, but there’s a second factor to consider — namely, what are the tax advantages? Tax deductions for vehicles used by businesses If you’re using a car to conduct business, there are two approaches allowed to you by IRS to deduct the costs on your tax returns for federal taxpayers. You may use what’s known as the standard mileage rate deduction, or choose to take advantage of the actual expense deduction. You can switch between the standard and actual expenses from year to year for a purchased vehicle but you must stick to the first option you select when leasing. Mileage deduction The standard mileage method allows you to be able to claim the miles you’ve driven by your company for federal tax return. The IRS announces the standard mileage rate that is used to determine the tax-deductible costs of operating a car for reasons of business each year. In 2022, the standard mileage rate will be 58.5 cents per mile driven for business purposes. That means that if you travel 15,000 miles for your business, you can deduct a total of $8,775. Lease payments You can be able to deduct the expense of monthly lease payments by using the actual expense deduction on the federal taxes you file. The specific amount of the lease payment deduction is contingent on the amount you use the vehicle exclusively for business. For instance, if your monthly lease payment is $400 and the vehicle is used for 50 per cent of the time by business it is possible to take $200 per month off as an expense. These benefits are only available if you sign up for the standard lease. You cannot get an income tax deduction under the federal tax code on monthly lease payments if you take on the lease-to-own option, which means you’ll own the car at the time of contract expiration instead of having to return the vehicle back to the dealership. Depreciation Only cars purchased are eligible to deduct the cost of depreciation and only if the actual expense deduction is used. The method used to determine how much your car depreciated over the year is usually Modified Accelerated Cost Recovery System (MACRS). Similar to the mileage deduction, the deduction for depreciation changes each year. In 2021, the maximum amount you could claim was $10,200 however, there are ways to increase this figure depending on the time when the vehicle entered service. You must review the IRS to be familiar with the ways you can depreciate your vehicle and other property as an owner of a business. Operating and maintenance expenses cost rules also allow for the deduction of other expenses like oil and gas changes as well as tire repairs and purchases for your leased or purchased vehicle. If your vehicle needs extensive maintenance or repairs for business reasons, keep careful note of it. In this way, you’ll be aware of exactly how much you spent and the amount your company can reduce tax costs during tax season. Expense differences between the purchase and lease vehicles. The initial cost could be lower when you lease a vehicle with the same brand, model and year when compared to purchasing it. As a business owner you can use those savings to be redirected to other business needs and investments. If you are certain that you will stay within the lease terms for wear and tear as well as the expected mileage, you could see that the less expensive monthly payments can generate more money for your business. If you are comparing the same vehicle as a lease versus a buy, your monthly installments and first down payments could be cheaper when you lease. There may be a reduction in maintenance costs in the event that your lease covers routine services, such as oil replacement. Purchasing wins out when it comes to the fact that you’ll ultimately own the vehicle, while leases have to be terminated at some point, and the business is left without equity. The cost of early termination when you have to terminate the lease early, and excessive mileage fees incurred if you go over the mileage limits can also cause significant expenses when it comes to leases. Both options are subject to additional fees and interest which means that it’s all about what your company’s needs to make use of the vehicle. Should you buy or lease a business vehicle? The tax advantages that could be derived from it are just one aspect for business owners. In the end, a car purchase or lease is a big cost for your company take a take a look at the issue from every angle before making a decision. Lease agreements typically limit the number of miles a car can be driven up to 10, 000 or 20,000 annually. Once you exceed this limit, the lease may be subject to a fine of between 10 and 50 cents per additional mile. If you are driving a good deal for your company, buying a car may be the better move. Also, the car must be kept in good condition. If you fail to keep on your side of the contract or if there’s excessive wear and tear on the vehicle after you return it you could face additional costs. It’s important to keep in mind that if you continually lease one vehicle after another, you will always have monthly payments for your car, in contrast to when you purchase a car and later own the vehicle completely. On the upside, if you are interested in having access to the newest automobiles with the latest technological features, leasing a vehicle can be a great way to achieve this, which allows you to purchase a new vehicle every three years or so. Additionally, since lease payments tend to be cheaper than a conventional car loan, you may be in a position to purchase a luxury car. In the end, as with the many aspects of running a company, there isn’t a one-size-fits-all solution in determining if leasing or purchasing a car is more tax-efficient. Consider how the vehicle is used, the upfront costs, long-term costs and any additional fees that could be incurred along with the number of deductions you might be eligible for before you purchase the right vehicle for your company. 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 writing and editing for Bankrate from late 2021. They are passionate about helping readers gain the confidence to control their finances through providing precise, well-studied information that breaks down complicated topics into manageable bites.
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