Deducting Vehicle Lease Payments

If you lease a vehicle for your business, you can generally use the actual cost method of computing your vehicle expenses. Then, you can deduct each lease payment as a rental expense. However, when business use of a leased vehicle is less than 100 percent, the deduction is scaled down in proportion to the personal use.

Example If you use a leased car 75 percent for business, and 25 percent for personal purposes and commuting, you can deduct only 75 percent of the lease payments. The percentage of use for business is determined using your mileage records.

Moreover, if a vehicle with a fair market value in excess of approximately $18,500 (for 2010) is leased, you must add back an additional amount (i.e., subtract it from your otherwise deductible amount) to offset a portion of the lease payments. This rule was enacted to prevent individuals from avoiding the luxury car depreciation limits that apply to purchased vehicles. The amounts that must be added into your income are called "inclusion amounts" and are taken from a price-based table issued annually by the IRS. These tables are published in IRS Publication 463, Travel, Entertainment, Gifts, and Car Expenses.

Please note that there is also a separate table for leased trucks and vans.

Planning Tools You can quickly get a copy of the inclusion amount tables for cars and trucks first leased in 2010, 2009, and 2008 to aid in your financial planning. If you leased your car before 2006, get IRS Publication 463, Travel, Entertainment, Gift, and Car Expenses, to find the tables for earlier years. Please note that there are separate tables for leased cars and leased trucks and vans. There was, through 2007, a table to use if you lease an electric automobile.

To use the table, find the value of your car on the first day of your lease term (or on the day you converted your personal car to business use) in the first column, and read across the line to the column that matches the year of your lease to find the dollar value to be included. Then prorate the dollar amount from the table for the number of days of the lease term included in your tax year, and multiply the prorated amount by your percentage of business use for the year (as calculated by using your mileage records).

Example Let's say that on January 17, 2010, you leased a car for 3 years and placed it in service for use in your business. The car had a fair market value of $32,250 on the first day of the lease term. You use the car 75 percent for business and 25 person for personal purposes during each year of the lease. Assuming you continue to use the car 75 percent for business, you use the tables to arrive at the following inclusion amounts for each year of the lease: Tax Year Dollar Amount Proration Based on Days Leased Business Use (%) Inclusion Amount 2010 40 349/365 75 $29 2011 87 365/365 75 65 2012 129 365/365 75 97 2013 129 16/366 75 4