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 offering you interactive tools and financial calculators that provide objective and original content. We also allow you to conduct research and compare data for free and help you make sound financial decisions. Bankrate has partnerships with issuers such as, but not limited to, American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Make Money The offers that appear on this website are provided by companies that compensate us. This compensation can affect the way and when products appear on the site, such as, for example, the order in which they appear in the listing categories and other categories, unless prohibited by law for our mortgage, home equity and other products for home loans. This compensation, however, does affect the content we publish or the reviews you read on this site. We do not contain the universe of companies or financial deals that could 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 late 2021. They are committed to helping readers gain confidence to take control of their finances through providing precise, well-researched and well-researched data that breaks down otherwise complex issues into digestible chunks. The Bankrate promises
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We are compensated in exchange for the promotion of sponsored goods and, services, or when you click on specific links on our site. Therefore, this compensation may influence the manner, place and in what order products appear within listing categories and categories, unless it is prohibited by law for our mortgage, home equity, and other home loan products. Other elements, such as our own website rules and whether a product is available in your region or within your own personal credit score could also affect how and where products appear on this site. While we strive to provide a wide range offers, Bankrate does not include details about every financial or credit product or service. As a business owner you’ll probably need to think more thought into whether you should purchase or lease your car as opposed to the typical driver. All the standard questions that you have to answer about whether you should lease or buy come into play, but there’s an additional factor — namely, how do you get tax advantages? Tax deductions for business vehicles When you use a vehicle for business purposes, there are two approaches accepted from the IRS to deduct the associated expenses on your federal tax return. You can use what’s referred to as the standard mileage deduction, or opt to use the actual expense deduction. It is possible to switch between the standard and actual expense from year to the year when you purchase a vehicle but you must stick with what you first pick when leasing. Mileage deduction : The standard mileage method allows you to claim miles driven for your business on your federal tax return. The IRS releases the standard mileage rates that can be used to determine the deductible cost of running a vehicle for business use each year. The rate for 2022 is 58.5 cents per mile to serve business needs. This means if you drive 15,000 miles in the course of your business, you are able to claim a deduction of up to $8,775. Lease payments You may deduct the cost of monthly lease payments by making use of the actual expense deduction you claim on your federal tax returns. The amount of allowance for lease payments is contingent on the amount of time you drive the vehicle solely for business purposes. For example, if your monthly lease payments are $400 and your vehicle is used at least 50 percent of the time by business it is possible to claim $200 per month as an expense. This benefit is only available when you sign up for a standard lease. It is not possible to claim a federal tax deduction for monthly lease payments if you take on the lease-to-own option, which means you will own the vehicle when the contract expires rather than needing to return the car back to the dealership. Depreciation Only cars purchased are eligible to deduct the cost of depreciation and only when the actual expense deduction is used. The method for determining how much your car depreciated throughout the year is typically Modified Accelerated Cost Recovery System (MACRS). Similar to the mileage deduction, the deduction for depreciation changes each year. The deduction for 2021 was maximum amount you could claim was $10,200, but there are options to increase this amount based on when the vehicle entered service. It is recommended to review the IRS to be familiar with the methods you can reduce the value of your vehicles and other assets 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 urgent repairs or maintenance for business reasons be sure to keep a detailed track of the expenses. In this way, you’ll be aware of precisely what you paid for — and how much your business can save on tax time. Cost differences between the purchase and lease vehicles. The initial cost could be lower when leasing a vehicle with the same brand, model and year in comparison to purchasing it. If you are a business owner, those savings can be used for other business needs and investments. If you are certain that you will stay within the lease terms for wear and tear and expected mileage, you may discover that the lower payment can yield more money for your business. If you are comparing the same vehicle as a lease versus a buy, your monthly payments and first down payments can be less expensive when you lease. There may be a reduction in expenses for maintenance if the lease covers the cost of regular maintenance, like oil changes. Purchasing has advantages when it comes to the fact that you’ll eventually own the car, while leases have to expire eventually, and your business will be left without equity. The cost of early termination when you need to end the lease early, and excessive mileage charges incurred when you exceed the mileage limits can also be significant in the case of leases. Both options are subject to charges for interest and other charges which means that it’s all about the way your company will require to utilize the vehicle. Is it better to either lease or buy a company vehicle? The potential tax benefits are only one of the factors to consider for owners of businesses. Ultimately, a vehicle purchase or lease is a big expense for your business and you should look at the problem from all angles prior to committing. Lease contracts typically limit the number of miles that a vehicle can be driven up to 10 or 20 miles per year. When you go beyond the limit, you could be subject to a penalty of between 10 and 50 cents per mile. If you are driving a good deal for your business, buying a car may be the right choice. It is also required that the vehicle be kept in good condition. If you fail to keep on your side of the agreement , or if you notice excessive wear and tear on the vehicle when you return it, there may be additional fees. Also, keep in the mind that when you lease one vehicle after another, you will always have monthly payments for your car, in contrast to when you purchase a vehicle and then own it outright. If you want to have access to the most recent car models with the latest technologies in the market, leasing a car can be a great way to achieve this, which allows you to get a brand new vehicle every three years or so. Additionally, since lease payments tend to be cheaper than a conventional car loan which means you’ll be in a position to purchase a luxury car. The bottom line is that, like the many aspects of running a business, there’s not a one-size-fits-all answer when it comes to if leasing or buying a vehicle offers tax benefits. Take into consideration how the vehicle will be used, upfront costs, long-term expenses and the possibility of additional charges in addition to the amount of deductions you might be eligible for before you purchase the right vehicle for your business. Find out more about 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 dedicated to helping readers gain confidence to control their finances through providing precise, well-studied information that break down complex topics into manageable bites.
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