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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 smarter financial decisions by providing you with interactive tools and financial calculators, publishing original and objective content. This allows users to conduct research and compare information at no cost – so that you can make financial decisions with confidence. Bankrate has partnerships 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 site are from companies that compensate us. This compensation may impact how and where products appear on this site, including for instance, 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 lending products. However, this compensation will not influence the information we provide, or the reviews you read on this site. We do not contain 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 committed to helping readers gain the confidence to manage their finances with clear, well-researched information that breaks down complicated issues into digestible chunks. The Bankrate promise

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You have money questions. Bankrate can help. Our experts have been helping you manage your finances for more than four years. We are constantly striving to provide consumers with the expert advice and tools needed to be successful throughout their financial journey. Bankrate follows a strict standard of conduct, so you can rest assured that our information is trustworthy and precise. Our award-winning editors and reporters provide honest and trustworthy information to assist you in making the right financial decisions. The content created by our editorial team is objective, truthful, and not influenced from our advertising. We’re open about how we are in a position to provide quality content, competitive rates and useful tools to you by explaining how we earn our money. Bankrate.com is an independent, advertising-supported publisher and comparison service. We are compensated for placement of sponsored products and, services, or by you clicking on certain links posted on our website. So, this compensation can influence the manner, place and in what order products are displayed within the categories of listing and categories, unless it is prohibited by law for our mortgage, home equity, and other products for home loans. Other elements, such as our own website rules and whether a product is offered in the area you reside in or is within your personal credit score can also impact 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. As a business owner you’ll probably need to think more thought into the decision to purchase or lease your car as opposed to the typical driver. There are a myriad of questions to ask whether to lease or purchase take place, but there’s an additional factor which is: how do you get tax benefits? Tax deductions for business vehicles If you are using a vehicle for business purposes There are two options allowed by the IRS to deduct the costs on your tax returns for federal taxpayers. You can use what’s referred to by the “standard mileage rate deduction, or decide to utilize the actual expense deduction. You can switch between standard expense and actual expense year-to- the year when you purchase a vehicle but you must stick to the first option you select when leasing. Mileage deductions The standard approach allows you to claim miles driven for your business on your federal taxes. The IRS releases the standard mileage rate that will be utilized to determine the deductible cost of operating a car for business use each year. The rate for 2022 is 58.5 cents per mile driven to serve business needs. That means that if you travel 15,000 miles for your business, you can claim a deduction of up to $8,775. Lease payments You may be able to deduct the expense of monthly lease payments making use of the actual expense deduction on your federal tax returns. The specific amount of the lease payment deduction is contingent on the amount of time you drive the vehicle exclusively for business. For example, if the monthly lease payment is $400 and the car is used at least 50 percent by business you are able to take $200 per month off as an expense. These benefits are only available if you sign on to a standard lease. It is not possible to claim a tax deduction from the federal government for lease payments made monthly in the event that you sign the lease-to-own option, which means that you own the vehicle at the time of contract expiration instead of needing to return the car at the expense of the dealer. Depreciation Only purchased vehicles qualify to deduct the cost of depreciation and only when the actual expense deduction is used. The method of determining the value of your vehicle’s depreciation throughout the year is typically Modified Accelerated Cost Recovery System (MACRS). Much like the mileage deduction depreciation deduction changes every year. In 2021, the maximum amount you could claim was $10,200 There are alternatives to increase the amount dependent on the date the vehicle entered service. It is recommended to review the IRS to become familiar with the methods you can reduce the value of your vehicles and other property as a business owner. Operating and maintenance expenses cost rules also allow for the deduction of other costs like gas, oil changes, vehicle repairs and tire purchases for your leased or purchased vehicle. If your vehicle needs major repairs or maintenance due to business use make sure you keep a meticulous note of it. In this way, you’ll be aware of exactly how much you spent — and how much your business can save on tax time. The cost difference between purchased and leased vehicles The up-front costs can be much lower when you lease a vehicle with the same brand model, year and year as when compared to purchasing it. For business owners, those savings can be used to fund other investments and needs of the business. As long as you’re sure you’ll stay within the lease terms for wear and tear and anticipated mileage, you might see that the less expensive payment can yield more cash for your business. If you compare the same car in a lease and a purchase, the monthly installments and your initial deposit may be lower for a lease. It is also possible to have lower expenses for maintenance if the lease includes routine services, such as oil replacement. Purchasing is the best option in the fact that you’ll eventually own the car however leases will have to be terminated at some point, and your business is left without equity. Costs for early termination if you need to end the contract early and excess mileage fees charged if you exceed the limit of mileage can cause significant expenses when it comes to leases. Both options are subject to additional fees and interest which means that it is dependent on the way your company will require to utilize the vehicle. Should you buy or lease a business vehicle? Tax benefits could be only one of the considerations that business proprietors must consider. The bottom line is that a vehicle purchase or lease is an enormous cost for your company and you should look at the problem from every angle before making a decision. Lease agreements typically limit the number of miles the car can be driven up to 10, 000 or 20,000 annually. Once you exceed that limit, the lease could be subject to a penalty of 10 to 50 cents per additional mile. If you drive a great deal for your business purchasing a car could be the right choice. It is also required that the vehicle is kept in good working order. If you fail to meet on your side of the contract or if there’s excess wear and tear on the vehicle at the time of return, there may be additional fees. It’s also worth bearing in mind that if you continually lease one vehicle after another, you will always have monthly car payments, unlike the case when you buy a car and eventually own the car outright. On the upside, if you want to have access to the latest cars with the most advanced technologies, leasing a vehicle can be a way to do this, allowing you to access a new vehicle every three years or so. Furthermore, since lease payments are generally less expensive than a traditional car loan and you can in a position to purchase a luxury vehicle. In the end, as with the many aspects of running a company, there isn’t a one size fits all answer regarding whether leasing or purchasing a car offers tax benefits. Take into consideration how the vehicle will be used, as well as upfront costs, long-term costs and any additional fees that could be incurred and the variety of deductions you might get before purchasing the right vehicle for your business. 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. Written by Rhys Subitch Edited by Auto loans editor Rhys has been editing and writing for Bankrate since late 2021. They are passionate about helping readers gain the confidence to control their finances through providing precise, well-studied information that breaks down otherwise complex topics into manageable bites.

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