How to use car lease payments as a tax deduction

If you lease a car that you use for business, you can write off a percentage of your monthly payments as a tax deduction. The tax benefits of using your leased car for business are considerable. You have to be careful to do the calculations correctly, however.

Track the amount of time you spend in the car for business purposes in a log. This can include running business errands, traveling to business appointments and other business related duties. Express that amount of time as a percentage of your total car use time.

Calculate the total amount you have paid for your car lease over a year. This is the sum total of your monthly lease payments.

Deduct the business use percentage of your lease payments from your income taxes. For example, if you use your car 50 percent of the time for business, half of your total lease payments can be taken as a tax deduction.

Add up additional car related expenses including gas, insurance, maintenance and repairs. The same percentage of these expenses can also be deducted for business purposes.

Factor in the "lease inclusion amount." Cars that cost over a certain amount are subject to a fee that reduces the amount of deductible lease expense. How to calculate this amount and more information about tax deductions for the business use of a car can be found in the IRS publication #463 (see Resources below).

Tip

Talk to an accountant if you are unsure of how much you should be writing off as tax deductions for your leased car. Tax deductions are greatest for cars with high monthly payments. Consequently, expensive luxury cars stand to save their owners more money in tax advantages. When you lease a car, the interest is rolled in the monthly payment making it tax deductible. Interest you pay on a car loan when you buy a car is not eligible for a tax deduction.

Warning

Buying a car to use for business also has associated tax deductions. Depending on the price of the car, your deductions can be higher if you buy the car. This usually happens with lower-priced cars after several years. If your taxes are audited you will need your records to back up your claims of business use time in your car. It's not usually enough to just say that you used the car for business purposes; you have to prove it.

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