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 decisions by offering you interactive tools and financial calculators, publishing original and objective content. This allows you to conduct your own research and compare data for free – so that you can make sound financial decisions. Bankrate has agreements with issuers, including but not restricted to, American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Earn Profit The offers that appear on this site are from companies who pay us. This compensation may impact how and where products appear on this website, for example for instance, the sequence in which they appear in the listing categories in the event that they are not permitted by law for our mortgage home equity, mortgage and other home lending products. However, this compensation will have no impact on the content we publish or the reviews you see on this site. We do not cover the entire universe of businesses or financial offerings that might 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 editing and writing for Bankrate since the end of 2021. They are passionate about helping readers gain the confidence to take control of their finances with concise, well-studied information that breaks down complex topics into manageable bites. The Bankrate promises
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We are compensated for the promotion of sponsored goods or services, or when you click on certain hyperlinks on our site. This compensation could influence the manner, place and in what order items are listed in the event that they are not permitted by law. This is the case for our loan products, such as mortgages and home equity and other home lending products. Other elements, such as our own website rules and whether or not a product is available in your area or at your personal credit score may also influence the manner in which products are featured on this website. We strive to provide the most diverse selection of products, Bankrate does not include details about every financial or credit product or service. If you are a business owner, you’ll likely have to give more thought into the decision to buy or lease your vehicles as opposed to the typical driver. All the standard questions that you have to answer about whether to lease or buy come into play, but there’s an additional factor that is, for example, how do you get tax benefits? Tax deductions for vehicles used by businesses If you are using a vehicle for business purposes there are two methods accepted to you by IRS to claim the expense on the federal tax form. It is possible to use what’s known by the “standard mileage deduction, or decide to utilize the actual expense deduction. It is possible to switch between the standard and actual expense year-to- an year with a car you have purchased but you must stick with what you first pick when leasing. Mileage deductions The standard method allows you to claim miles driven by your company for federal tax returns. The IRS announces the standard mileage rate which will be utilized to calculate the deductible cost of operating a car for business use each year. For 2022, the rate will be 58.5 cents for every mile driven for business purposes. If you travel 15,000 miles to support your company, you could claim a deduction of up to $8,775. Lease payments You may take the cost of lease payments per month making use of the actual expense deduction you claim on the federal taxes you file. The specific amount of the lease payment deduction is contingent on how much you drive the car exclusively for business purposes. For example, if your monthly lease payment is $400 and the vehicle is used for 50 percent for business it is possible to claim $200 per month as an expense. This benefit is only available when you sign up for an ordinary lease. You are not able to get a federal tax deduction for lease payments made monthly in the event that you sign an agreement to purchase the vehicle, which means you’ll own the car at the time of contract expiration instead of needing to return the car to the dealer. Depreciation Only vehicles purchased qualify for the depreciation deduction and only if an actual deduction for expenses is used. The method of determining the value of your vehicle’s depreciation over the year is usually Modified Accelerated Cost Recovery System (MACRS). Like the mileage deduction, the deduction for depreciation changes each year. The deduction for 2021 was maximum amount you could claim was $10,200 however, there are ways to increase this figure depending on the time when the vehicle was put into service. You should review by the IRS to be familiar with the methods you can reduce the value of your vehicles and other property as the owner of a business. Maintenance and operating expenses Actual expense rules also include the deduction of any other expenses like gas, oil changes as well as tire repairs and purchases for your purchased or leased vehicle. If your vehicle needs urgent repairs or maintenance because of business-related use make sure you keep a meticulous note of it. So, you’ll know the exact amount you spent — and how much your company can save during tax season. Expense differences between leased and purchased vehicles The up-front costs may be far less when you lease a car that is the same model, make model, year and year as in comparison to purchasing it. As a business owner, those savings can be used to fund other investments and needs of the business. As long as you’re sure you’ll adhere to 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 cash to your business. If you compare the same car with a lease or acquisition, monthly payments and the initial down payment could be cheaper in a lease. It is also possible to have lower maintenance costs in the event that your lease includes routine services, such as oil adjustments. Purchasing wins out in the fact that you will eventually own the vehicle, while leases have to end eventually — and your business will be left without equity. Costs for early termination if you have to terminate the lease earlier and the excess mileage charges incurred when you exceed the mileage limits can also cause significant expenses when it comes to leases. Both options are subject to charges for interest and other charges and, in the end, it is dependent on the way your company will require to make use of the vehicle. Do you prefer to buy or lease a business vehicle? The tax advantages that could be derived from it are only one of the considerations that business proprietors must consider. The bottom line is that a vehicle purchase or lease is an enormous expense for your business and you should consider the issue from every angle before making a decision. Lease contracts typically restrict the amount of miles the car can be driven up to 10, 000 or 20,000 annually. If you go over the limit, you could be subject to a penalty of between 10 and 50 cents for each additional mile. If you drive a great deal for your business, buying a car may be the best option. It is also required that the vehicle remain in good order. If you fail to keep on your side of the agreement or if there’s excessive wear and tear to the vehicle at the time of return you could face additional fees. It’s important to keep in mind that if you continually lease a car one after the other it will be a constant regular monthly payments on your car, which is not the case when you purchase a vehicle and then own it in full. However, if you like having access to the most recent cars with the most advanced technological features, leasing a vehicle can be a way to do this, which allows you to purchase a new car every three years or so. In addition, because lease payments tend to be cheaper than a conventional car loan and you can capable of affording a more expensive vehicle. The bottom line is that, like all aspects of running your company, there isn’t a one-size-fits-all answer regarding whether leasing or buying a vehicle offers tax benefits. Consider how the vehicle will be used, as well as upfront costs, long-term expenses and any additional fees that could be incurred along with the number of deductions that you may receive before investing in an automobile for your company. Learn 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 writing and editing for Bankrate since late 2021. They are passionate about helping readers gain the confidence to take control of their finances with precise, well-studied information that breaks down otherwise complex topics into manageable bites.
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