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 better financial decisions by offering you interactive tools and financial calculators that provide objective and original content. This allows users to conduct research and compare information for free to help you make sound financial decisions. Bankrate has partnerships with issuers, including but not limited to American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Make Money The deals that are advertised on this site are from companies that compensate us. This compensation could affect how and when products are featured on this site, including for instance, the order in which they may be listed within the categories of listing and other categories, unless prohibited by law. This applies to our mortgage home equity, mortgage and other home lending products. This compensation, however, does not influence the content we publish or the reviews that you read on this site. We do not cover the entire universe of businesses or financial offerings that might 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. Written by Rhys Subitch Edited by Auto loans editor Rhys has been writing and editing for Bankrate since the end of 2021. They are dedicated to helping readers gain confidence to manage their finances by providing clear, well-researched information that breaks down complex subjects into bite-sized pieces. The Bankrate promises
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We receive compensation for the promotion of sponsored goods or services, or when you click on certain links posted on our website. So, this compensation can impact how, where and in what order items appear within listing categories, except where prohibited by law. We also offer loan products, such as mortgages and home equity and other home lending products. Other factors, like our own rules for our website and whether the product is available within your area or at your self-selected credit score range could also affect the manner in which products are featured on this site. We strive to provide an array of offers, Bankrate does not include information about each financial or credit item or service. As a business owner you’ll probably need to think more thought into whether you should buy or lease your vehicles than the average driver. The usual questions you have to ask whether to lease or purchase come into play, but there’s a second factor to consider which is: how do you get tax advantages? Tax deductions for business vehicles If you’re using a car for business purposes there are two methods that are permitted to you by IRS to deduct the expense on the federal tax form. You may use what’s known by the “standard mileage deduction, or opt to use the deduction for actual expenses. You can swap from standard to actual expenses from year to the year when you purchase a vehicle, but you must stay the same vehicle you initially chose when leasing. Mileage deductions The standard method lets you claim miles driven by your company for federal taxes. The IRS releases the standard mileage rate that can be used to calculate the tax-deductible costs of running a vehicle for business purposes each year. In 2022, the standard mileage rate of 58.5 cents per mile driven to serve business needs. That means that if you travel 15,000 miles to support your business, you are able to take a deduction totalling $8,775. Lease payments. You are able to take the cost of monthly lease payments using the actual expense deduction on the federal taxes you file. The amount of lease payment deduction allowed depends on how much you drive the vehicle solely for business. For example, if your monthly lease payment is $400 and the vehicle is used for 50 percent of the time for business, you can claim $200 per month in expenses. This benefit is only available if you sign up for an ordinary lease. You are not able to claim an income tax deduction under the federal tax code for lease payments made monthly in the event that you sign the lease-to-own option, which means you’ll own the car at the time of contract expiration instead of returning the vehicle at the expense of the dealer. Depreciation Only cars purchased are eligible for the depreciation deduction — and only when you actually use the deduction used. The method for determining how much your car depreciated over the year is usually Modified Accelerated Cost Recovery System (MACRS). Like the mileage deduction, depreciation deduction changes every year. The deduction for 2021 was maximum amount you could deduct was $10,000 There are alternatives to increase this figure depending on the time when the vehicle was put into service. It is recommended to review the IRS to familiarize yourself with the ways you can depreciate your vehicle and other assets 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 requires extensive maintenance or repairs because of business-related use make sure you keep a meticulous note of it. This way, you’ll know exactly how much you spent and how much your business could reduce tax costs during tax season. Cost differences between leased and purchased vehicles. Costs upfront may be far less when you lease a car of the same make, model and year in comparison to purchasing it. For business owners, those savings can be used to fund 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 anticipated mileage, you might see that the less expensive payment can yield more money for your business. When comparing the same vehicle with a lease or buy, your monthly installments as well as the initial down payment may be lower in a lease. There may be a reduction in maintenance costs in the event that your lease covers regular maintenance, like oil changes. Purchasing is the best option in the fact that you will eventually own the vehicle, while leases have to expire eventually, and the business will be left without equity. Costs for early termination if you have to terminate 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 options come with charges for interest and other charges which means that it is dependent on how your business will need to use the vehicle. Do you prefer to lease or purchase a business vehicle? The tax advantages that could be derived from it are only one of the factors to consider for owners of businesses. In the end, a car purchase or lease is a big expense for your business and you should look at the problem from all angles before committing. Lease contracts typically limit the number of miles that a vehicle can be driven up to 10,000 or 20,000 miles per year. If you go over that limit, the lease may have a penalty of between 10 and 50 cents per additional mile. If you are driving a good deal for your company purchasing a car could be the better move. 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 there’s an excessive amount of wear to the vehicle after you return it, there may be additional costs. It’s important to keep in your mind that if you continue to lease one vehicle 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 in full. If you like having access to the latest automobiles with the latest technological features and available, leasing a car could be a great way to achieve this, which allows you to access a new car every three or four years. In addition, because lease payments are generally less expensive than a traditional car loan and you can able to afford a higher-end vehicle. The bottom line is that, like many aspects of running your company, there isn’t a one size fits all answer in determining if 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 the possibility of additional charges and the variety of deductions that you may get before purchasing the right vehicle for your company. 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 writing and editing for Bankrate from late 2021. They are passionate about helping readers gain confidence to manage their finances by providing clear, well-researched information that breaks down complicated subjects into digestible chunks.
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