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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 better financial decisions by offering you interactive financial calculators and tools as well as publishing objective and unique 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 restricted 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 may impact how and where products appear on this website, for example for instance, the order in which they be listed within the categories of listing, except where prohibited by law. This applies to our mortgage or home equity products, as well as other products for home loans. However, this compensation will have no impact on the information we provide, or the reviews appear on this website. We do not cover the entire universe of businesses 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 writing and editing for Bankrate since late 2021. They are committed to helping readers gain the confidence to manage their finances with precise, well-researched and well-researched data that breaks down complex subjects into bite-sized pieces. The Bankrate promises

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We are compensated for placement of sponsored products andservices or by you clicking on certain hyperlinks on our site. Therefore, this compensation may 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 factors, such as our own rules for our website and whether the product is available in your area or at your self-selected credit score range may also influence how and where products appear on this website. While we strive to provide 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 likely need to put more thought into whether you should purchase or lease your vehicle as opposed to the typical driver. The usual questions you have that you have to answer about whether you should lease or buy are relevant, however there’s an additional factor which is: how do you get tax benefits? Tax deductions for business vehicles When you use a vehicle for business purposes there are two methods allowed from the IRS to deduct the expenses on your federal tax return. You may use what’s known by the «standard mileage deduction, or opt to use the deduction for actual expenses. It is possible to switch from standard to actual expenses from year to an year with a car you have purchased however, you have to stick the same vehicle you initially chose when leasing. Mileage deduction : The standard mileage method lets you be able to claim the miles you’ve driven for your business on your federal taxes. The IRS releases the standard mileage rates that can be used to determine the deductible cost of operating a car for reasons of business each year. The rate for 2022 will be 58.5 cents per mile driven for business purposes. If you travel 15,000 miles in the course of your company, you could deduct a total of $8,775. Lease payments You can be able to deduct the expense of monthly lease payments taking the expense deduction on the federal taxes you file. The exact amount of lease payment deduction is contingent on how much you drive the vehicle exclusively for business. If, for instance, your monthly lease payments are $400 and your vehicle is used for 50 per cent of the time for business you are able to take $200 per month off as an expense. These benefits are only available if you sign up for an ordinary lease. You cannot take advantage of a tax deduction from the federal government for lease payments made monthly when you sign an agreement to purchase the vehicle, which means you’ll own the car when the contract expires rather than needing to return the car to the dealer. Depreciation Only purchased vehicles qualify for the depreciation deduction — and only when you actually use the deduction taken into consideration. The method of determining the amount your car has depreciated throughout the year is typically Modified Accelerated Cost Recovery System (MACRS). Much like the mileage deduction the deduction for depreciation changes each year. The deduction for 2021 was maximum depreciation you could deduct was $10,000 There are alternatives to increase this amount depending on the time when the vehicle entered service. You must review the IRS to be familiar with the various ways to depreciate your vehicle and other property as an owner of a business. Operating and maintenance costs Actual cost rules also allow for the deduction of any other expenses such as oil, gas, vehicle repairs and tire purchases for your leased or purchased vehicle. If your vehicle requires urgent repairs or maintenance due to business use make sure you keep a meticulous record of it. This way, you’ll know precisely what you paid for and the amount your business can reduce tax costs during tax season. Expense differences between the purchase and lease vehicles The up-front costs can be much lower when leasing a vehicle with the same brand, model and year when compared to purchasing it. As a business owner the savings could be used for investment and other needs for your business. If you are certain that you will remain within the lease conditions for wear-and-tear as well as expected mileage, you may find that the smaller payments open up more cash for your business. If you are comparing the same vehicle with a lease or acquisition, monthly payments and first down payments can be lower for a lease. It is also possible to have lower maintenance costs in the event that your lease covers the cost of routine maintenance services, for example, oil replacement. Purchasing is the best option in the fact that you’ll eventually own the car and leases must end eventually — and your company is left with no equity. The cost of early termination when you have to terminate the lease earlier and the excess mileage charges incurred when you exceed the limit of mileage can cause significant expenses when it comes to leases. Both options are subject to interest and other fees and, in the end, it’s all about the way your company will require to make use of the vehicle. Do you prefer to either lease or buy a company vehicle? The potential tax benefits are only one of the factors to consider for owners of businesses. The bottom line is that a vehicle purchase or lease can be a significant expense for your business, so look at the problem from all angles prior to committing. Lease agreements typically restrict the amount of miles the car can be driven up to 10, 000 or 20,000 annually. When you go beyond that limit, the lease may be subject to a fine of 10 to 50 cents for each additional mile. If you’re driving a fantastic deal for your company, buying a car may be the best option. also require that the vehicle be kept in good condition. If you fail to keep up with the agreement or if there’s excess wear and tear to the vehicle when you return it, there may be additional fees. It’s important to keep in your mind that if you continue to lease a car one after the other and you’ll always be required to pay monthly car payments, unlike when you purchase a vehicle and then own it outright. If you are interested in having access to the newest cars with the most advanced technologies, leasing a vehicle can be a great way to achieve this, which allows you to access a new vehicle every three years or so. Furthermore, 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 the many aspects of running a business, there’s no one size fits all answer when it comes to if a lease or buying is more tax-efficient. 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 could be eligible for before you purchase a car for your company. 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. 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 dedicated to helping readers gain confidence to take control of their finances with clear, well-researched information that break down complex subjects into bite-sized pieces.

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