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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 aim is to assist you make smarter financial decisions by providing you with interactive financial calculators and tools that provide objective and original content. We also allow users to conduct research and compare data for free to help you make financial decisions with confidence. Bankrate has partnerships with issuers such as, but not restricted to, American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Earn Profit The products that are featured on this website are provided by companies that pay us. This compensation could affect how and where products appear on this website, for example such things as the order in which they may appear within the listing categories in the event that they are not permitted by law. Our mortgage, home equity and other home loan products. However, this compensation will not influence the content we publish or the reviews you see on this site. We do not include the vast array of companies or financial offers that may be open 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 editing and writing for Bankrate since late 2021. They are committed to helping readers gain the confidence to manage their finances through providing concise, well-studied information that breaks down complex topics into manageable bites. The Bankrate guarantee

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There are money-related questions. Bankrate can help. Our experts have helped you understand your money for over four decades. We are constantly striving to provide consumers with the expert advice and tools required to be successful throughout their financial journey. Bankrate follows a strict , so you can trust that our content is truthful and reliable. Our award-winning editors, reporters and editors create honest and accurate content to help you make the right financial decisions. The content created by our editorial team is factual, objective and is not influenced by our advertisers. We’re honest regarding how we’re in a position to provide quality information, competitive rates and helpful tools to you by explaining how we make money. Bankrate.com is an independent, advertising-supported publisher and comparison service. We are compensated in exchange for placement of sponsored products and, services, or when you click on certain hyperlinks on our website. This compensation could affect the way, location and in what order items are listed in the event that they are not permitted by law. We also offer credit, mortgage and other products for home loans. Other elements, such as our own website rules and whether or not a product is available within the area you reside in or is within your self-selected credit score range may also influence how and where products appear on this site. While we strive to provide the most diverse selection of products, Bankrate does not include specific information on every credit or financial 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. There are a myriad of questions to ask whether to lease or buy are relevant, however there’s an additional factor which is: which are tax advantages? Tax deductions on business vehicles When you use a vehicle for business, there are two approaches that are permitted from the IRS to claim the expenses on your federal tax return. It is possible to use what’s known by the «standard mileage deduction, or opt to use the actual expense deduction. It is possible to switch between the standard and actual expenses from year to the year when you purchase a vehicle but you must stick the same vehicle you initially chose when leasing. Mileage deduction The standard mileage method lets you declare the miles you drive for your business on your federal tax returns. The IRS announces the standard mileage rates that is used to calculate the deductible cost of running a vehicle for business purposes every year. In 2022, the standard mileage rate is 58.5 cents per mile for business purposes. If you travel 15,000 miles for your business, you are able to take a deduction totalling $8,775. Lease payments You can take the cost of monthly lease payments by taking the expense deduction you claim on the federal taxes you file. The amount of lease payment deduction 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 the car is used at least 50 percent of the time by business it is possible to take $200 per month off in expenses. These benefits are only available if you sign up for a standard lease. It is not possible to claim 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 after the contract ends rather than returning the vehicle to the dealer. Depreciation Only vehicles purchased qualify for depreciation deductions and only if an actual deduction for expenses is utilized. The method for determining the amount your car has depreciated throughout the year is typically Modified Accelerated Cost Recovery System (MACRS). Similar to the mileage deduction, the deduction for depreciation changes each year. In 2021, the highest amount you could deduct was $10,200 however, there are ways to increase this amount dependent on the date the vehicle was put into service. You should review by the IRS to familiarize yourself with the ways you can depreciate your vehicle and other assets as the owner of a business. Operating and maintenance expenses cost rules also allow for the deduction of other costs 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 record of it. This way, you’ll know precisely what you paid for and the amount your company can save during tax season. Expense differences between purchased and leased vehicles. The initial cost can be much lower when leasing a vehicle that is the same model, make, model and year in comparison to purchasing it. For business owners you can use those savings to be used to fund other business needs and investments. Provided you know you will remain within the lease conditions for wear-and-tear as well as the expected mileage, you could see that the less expensive payments open up more money for your business. If you are comparing the same vehicle as a lease versus a acquisition, monthly payments and the initial down payment can be lower when you lease. There may be a reduction in maintenance costs in the event that your lease covers the cost of regular maintenance, like oil replacement. Purchasing wins out in the fact that you will ultimately own the vehicle however leases will have to end eventually — and your business is left with no equity. Early termination expenses if you need to end the contract early and excess mileage fees charged if you go over the mileage limits can also cause significant expenses in the case of leases. Both of these options have interest and other fees and, in the end, it depends on what your company’s needs to utilize the vehicle. Should you buy or lease a business vehicle? The potential tax benefits are only one of the considerations for business owners. The bottom line is that a vehicle purchase or lease is an enormous expense for your business, so take a look at the issue from every angle before making a decision. Lease contracts usually restrict the amount of miles the car can be driven up to 10, 000 or 20,000 annually. If you go over this limit, the lease could be subject to a penalty of 10 to 50 cents per additional mile. If you are driving a good deal for your company then purchasing a vehicle may be the better move. Also, the car must remain in good order. If you fail to keep up your end of the contract or if there’s an excessive amount of wear to the vehicle after you return it the car, you may face additional costs. It’s important to keep in the mind that when you lease one car after another it will be a constant regular monthly payments on your car, which is not the case the case when you buy a car and eventually own the car completely. If you like having access to the most recent car models with the latest technology features available in the market, leasing a car can be an option to accomplish this, allowing you to purchase a new car every three or four years. In addition, because lease payments tend to be lower than a traditional car loan and you can in a position to purchase a luxury car. In the end, as with many aspects of running your business, there’s not a one-size-fits-all solution when it comes to if a lease or buying offers tax benefits. Take into consideration how the vehicle is used, the upfront expenses, the cost of long-term maintenance and potential added fees and the variety of deductions you could get before purchasing an automobile 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. 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 by providing clear, well-researched information that breaks down complicated topics into manageable bites.

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