Leasing a car is a popular option for consumers and business owners in the market for a new vehicle. With low monthly payments, short-term commitments, and good maintenance packages, leases can provide a variety of advantages. However, there are limitations. Two of the most important factors to consider if you are thinking about leasing a vehicle through your business are:
- How much will you be using the vehicle for business purposes?
- How many miles do you anticipate driving?
Let’s explore why these questions are important for your tax returns and your bottom line if you want to lease a car through your business.
Use and Taxes
One of the most frequently asked questions is: “Can I deduct my lease payments from my taxes?” The answer depends on a few factors.
First, it depends on what method you are going to use to report the deductible costs of operating a vehicle. There are two options: the “actual operating expenses” method and the “standard mileage rate” method. You or your tax adviser should calculate your deductions using both of these methods to determine which will be most advantageous for your business.
If you want to deduct your lease payments, you’ll need to use the actual operating expense method. Then, you’ll need to determine how much you drive your automobile for business versus personal use, as the IRS has strict rules about these deductions.
Here is the exact verbiage from the IRS regarding automobile operating cost deductions:
“If you use your car in your job or business and you use it only for that purpose, you may deduct its entire cost of operation (subject to limits…). However, if you use the car for both business and personal purposes, you may deduct only the cost of its business use.”
So, if you use the vehicle for business 100% of the time, you can deduct 100% of the operating expenses, including your lease payments. Likewise, if you use the car for business 50% of the time, you can only deduct 50% of the costs. Leasing a car, rather than buying one, can make these deductions a little more straightforward, as you won’t need to take depreciation into account when doing your calculations. As always – no matter how much you use the car, it is important to save receipts and keep good records of your expenditures.
Your anticipated mileage is one of the biggest considerations when leasing a vehicle because leases always have mileage limits. If you go over the limit, it will cost you. In general, the average lease allows you to drive 10,000 or 12,000 miles per year over the life of the lease. So, if you lease a car for 3 years at 12,000 miles per year – you are restricted to driving the car no more than 36,000 miles over the course of the lease or you will incur hefty penalties. Going over the mileage limit is not cheap. You can negotiate higher mileage allowances, but these will increase your monthly payments and may make leasing less cost effective for you.
Anytime you need to get a new vehicle, the options can be overwhelming. Leasing a car through your business has definite advantages and limitations. As with any big financial decision, it is always a good idea to consult your financial advisor to help explore your options, maximize your investment, and minimize your tax burden.