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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 passionate about helping readers gain confidence to manage their finances through providing clear, well-researched information that breaks down complex subjects into bite-sized pieces. The Bankrate promise

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We are compensated for the placement of sponsored products andservices or through you clicking certain hyperlinks on our website. This compensation could affect the way, location and in what order items appear within listing categories in the event that they are not permitted by law for our mortgage, home equity, and other products for home loans. Other elements, such as our own proprietary website rules and whether or not a product is available in your area or at your personal credit score can also impact the manner in which products are featured on this website. While we strive to provide the most diverse selection of products, Bankrate does not include details about every credit or financial product or service. If you’re a business owner, you likely need to put more thought into the decision to buy or lease your vehicles as opposed to the typical driver. There are a myriad of questions that you have to answer about whether to lease or purchase come into play, but there’s a second factor to consider which is: which are tax benefits? Tax deductions for vehicles used by businesses If you’re using a car for business purposes There are two options accepted to you by IRS to deduct the expenses on your federal tax return. It is possible to use what’s known as the normal mileage rate deduction, or you can decide to utilize the deduction for actual expenses. You can swap between standard expense and actual expenses from year to an year with a car you have purchased, but you must stay with what you first pick when leasing. Mileage deduction : The standard mileage approach allows you to declare the miles you drive for your business on your federal tax return. The IRS sets the standard mileage rates that can be used to calculate the tax-deductible costs of running a vehicle for business use every year. In 2022, the standard mileage rate of 58.5 cents per mile driven for business use. This means if you drive 15,000 miles to support your business, you can claim a deduction of up to $8,775. Lease payments. You are able to take the cost of monthly lease payments by using the actual expense deduction in your federal tax returns. The exact amount of lease payment deduction allowed depends on the amount you use the vehicle solely for business purposes. For instance, if the monthly lease payment is $400 and the car is used 50 percent to work, you can take $200 per month off in expenses. These benefits are only available when you sign on to a standard lease. You cannot get a federal tax deduction for lease payments made monthly in the event that you sign the lease-to-own option, which means that you own the vehicle at the time of contract expiration rather than returning the vehicle back to the dealership. Depreciation Only purchased vehicles qualify for depreciation deductions and only when you actually use the deduction used. 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. The deduction for 2021 was maximum depreciation you could claim was $10,200, but there are options to increase the amount depending on the time when the vehicle was placed in service. You must review the IRS to become familiar with the various ways to depreciate your vehicles and other property as an owner of a business. Operating and maintenance costs Actual cost rules also allow for the deduction of other costs like oil and gas changes repair of vehicles, and tire purchases for your newly purchased or leased vehicle. If your vehicle needs major repairs or maintenance because of business-related use make sure you keep a meticulous track of the expenses. So, you’ll know the exact amount you spent and the amount your business can save on tax time. Cost differences between leased and purchased vehicles. The initial cost can be much lower when you lease a car of the same make and model as well as year, compared to buying it. For business owners, those savings can be used for investment and other needs for your business. Provided you know you will adhere to the lease terms 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 compare the same car in a lease and a buy, your monthly installments and your initial deposit can be cheaper when you lease. There may be a reduction in maintenance costs in the event that your lease covers routine services, such as oil changes. Purchasing has advantages in the fact that you’ll ultimately own the vehicle however leases will have to expire eventually, and your company is left with no equity. Early termination expenses if you need to end the contract early and excess mileage fees charged if you exceed the limit of mileage can be significant when it comes to leases. Both options come with interest and other fees and, in the end, it’s all about what your company’s needs to utilize the vehicle. Do you prefer to buy or lease a business vehicle? The tax advantages that could be derived from it are only one of the considerations that business proprietors must consider. 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 all angles prior to committing. Lease contracts usually limit the number of miles a car is allowed to travel to 10,000 or 20,000 miles annually. Once you exceed this limit, the lease may be subject to a fine of between 10 and 50 cents per additional mile. If you drive a great deal for your company, buying a car may be the right choice. It is also required that the vehicle be kept in good condition. If you fail to meet on your side of the contract or if there’s excess wear and tear on the car when you return it, there may be additional charges. It’s important to keep in mind that if you continually lease a car one after the other and you’ll always be required to pay monthly car payments, unlike the case when you buy a car and then own it outright. On the upside, if you are interested in having access to the latest car models with the latest technological features in the market, leasing a car can be a way to do this, which allows you to access a new car every three or four years. Additionally, since leasing payments are typically less expensive than a traditional car loan which means you’ll be able to afford a higher-end vehicle. In the end, as with many aspects of running your business, there’s no one-size-fits-all answer when it comes to if leasing or buying a vehicle offers tax benefits. Consider how the vehicle is used, the upfront costs, long-term costs and potential added fees in addition to the amount of deductions you could be eligible for before you purchase an automobile 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. 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 the confidence to control their finances with concise, well-researched and well-studied content that breaks down otherwise complex subjects into bite-sized pieces.

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