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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 offering you interactive financial calculators and tools, publishing original and objective content. This allows you to conduct your own research and compare information at no cost to help you make financial decisions with confidence. Bankrate has partnerships with issuers including, but not limited to, American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Earn Profit The deals that are advertised on this website are provided by companies that pay us. This compensation could affect how and when products are featured on the site, such as for instance, the order in which they may appear within the listing categories and other categories, unless prohibited by law. This applies to our mortgage or home equity products, as well as other home lending products. But this compensation does not influence the information we publish, or the reviews that you read on this site. We do not include the vast array of companies 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. Edited 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 take control of their finances with concise, well-studied information that breaks down complex subjects into bite-sized pieces. The Bankrate guarantee
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This compensation could influence the manner, place and when products are displayed within the categories of listing, except where prohibited by law for our credit, mortgage, and other products for home loans. Other factors, like our own rules for our website and whether the product is available within the area you reside in or is within your self-selected credit score range could also affect the manner in which products are featured on this site. Although we try to offer an array of offers, Bankrate does not include specific information on each financial or credit item or service. If you are a business owner, you'll probably need to think more thought into whether you should purchase or lease your vehicle than the average driver. There are a myriad of questions to consider whether you should lease or buy are relevant, however there's a second factor to consider -- namely, what are the tax advantages? Tax deductions for vehicles used by businesses When you use a vehicle for business purposes there are two methods that are permitted by the IRS to deduct the associated expense on the federal tax form. It is possible to use what's known as the standard mileage deduction, or you can choose to take advantage of the actual expenses deduction. It is possible to switch between the standard and actual expense year-to- an year with a car you have purchased, but you must stay to the first option you select when leasing. Mileage deduction The standard mileage method allows you to be able to claim the miles you've driven by your company for federal tax return. The IRS sets the standard mileage rate which will be utilized to determine the tax-deductible costs of running a vehicle for business purposes every year. In 2022, the standard mileage rate of 58.5 cents per mile to serve business needs. This means if you drive 15,000 miles for your business, you can claim a deduction of up to $8,775. Lease payments You may take the cost of monthly lease payments by taking the expense deduction on the federal taxes you file. The specific amount of the lease payment deduction allowed depends on the amount you use the vehicle exclusively for business purposes. For example, if your monthly lease payments are $400 and your vehicle is used 50 percent to work it is possible to deduct $200 per month in expenses. These benefits are only available if you sign the standard lease. You cannot claim a federal tax deduction on monthly lease payments in the event that you sign a lease-to-own contract, meaning that you own the vehicle after the contract ends rather than needing to return the car at the expense of the dealer. Depreciation Only purchased vehicles qualify to deduct the cost of depreciation -- and only when an actual deduction for expenses is utilized. The method of determining the amount your car has depreciated throughout the year is typically Modified Accelerated Cost Recovery System (MACRS). Much like the mileage deduction the depreciation deduction is subject to change each year. The deduction for 2021 was maximum depreciation you could deduct was $10,000, 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 be familiar with the various ways to depreciate your vehicles and other assets 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 as well as tire repairs and purchases for your purchased or leased vehicle. If your vehicle needs urgent repairs or maintenance due to business use make sure you keep a meticulous track of the expenses. This way, you'll know exactly how much you spent and how much your business can save on tax time. Expense differences between the purchase and lease vehicles The up-front costs could be lower when leasing a vehicle that is the same model, make, model and year when compared to purchasing it. For business owners the savings could be redirected to other investments and needs of the business. As long as you're sure you'll stay within the lease terms for wear and tear and anticipated mileage, you might see that the less expensive payments open up more cash for your business. If you are comparing the same vehicle as a lease versus a purchase, the monthly installments and your initial deposit could be less expensive when you lease. You may also have reduced maintenance costs in the event that your lease includes routine services, such as oil replacement. Purchasing wins out in the fact that you will eventually own the car however leases will have to end eventually -- and your company will be left without equity. Early termination expenses if you need to end the lease early, and excessive mileage fees charged if you go over the limits on mileage could add significant costs in the case of leases. Both options are subject to interest and other fees, so ultimately, it's all about what your company's needs to make use of the vehicle. Should you lease or purchase a business vehicle? Tax benefits could be only one of the factors for business owners. Ultimately, a vehicle purchase or lease is an enormous cost for your company, so look at the problem from all angles before committing. Lease contracts typically restrict the amount of miles that a vehicle is allowed to travel to 10 or 20 miles annually. If you go over this limit, the lease could be subject to a penalty of between 10 and 50 cents per mile. If you're driving a fantastic deal for your business, buying a car may be the best option. Also, the car must remain in good order. If you fail to keep on your side of the agreement or if there's excessive wear and tear to the vehicle at the time of return, there may be additional fees. Also, keep in your mind that if you continue to lease a car one after the other it will be a constant monthly payments for your car, in contrast to the case when you buy a car and eventually own the car outright. However, if you are interested in having access to the newest automobiles with the latest technologies and available, leasing a car could be an option to accomplish this, which allows you to get a brand new car every three or four years. Furthermore, since lease payments are generally lower than a traditional car loan and you can able to afford a higher-end car. The bottom line As with many aspects of running your business, there's not a one-size-fits-all answer regarding whether leasing or purchasing a car offers tax benefits. Think about how the car will be used, as well as upfront expenses, the cost of long-term maintenance and the possibility of additional charges along with the number of deductions you could get before purchasing an automobile for your business. 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 the end of 2021. They are passionate about helping readers gain the confidence to take control of their finances through providing precise, well-studied information that break down complex topics into manageable bites.
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