Business owners are constantly considering leasing business vehicles. In comparison to ownership, leasing allows you low monthly payments and the ability to frequently change vehicles. While this allows you to constantly stay up with new models and features, there are several other considerations you must evaluate before deciding to lease a vehicle. Most importantly, is being able to deduct leased vehicles from your taxes. There is not a clear answer to the question, if you do wish to claim your leased vehicle on taxes, there are several requirements you must be aware of. If you are wondering if your business car lease meets tax deduction requirements, continue reading this post.
Limited Vehicle Exceptions
Limited vehicle exceptions restrict some leased company cars from meeting tax deductions. The term business vehicles only extends to cars, vans, or trucks that are used for business activities. Vehicles that are utilized as pieces of equipment, rather means of transportation, do not qualify. For example, you cannot claim dump trucks, cement mixers, or bulldozers on your taxes. In addition, you cannot use hired vehicles, such as taxis or transportation vans. Beware of limited vehicle exceptions when looking to claim deductions on your business lease.
Restricted Luxury Statuses
Deduction requirements also restrict deductions based on vehicle value. Recently, Congress passed specific laws dictating a vehicles status in value. In the first year of ownership, a vehicle cannot have a written-off depreciation amount of more than $10,100. Even though you are considering leasing vehicles, these restrictions have made deduction requirements on leases far more stringent. On SUVs, deductions can even be based off of the weight of the vehicle. If you want to claim you vehicle lease as a deduction, beware of restricted luxury statuses.
Deductions On Depreciation
Consider how leasing a business vehicle restricts your tax deductions on depreciation. The payments you make on your lease are tax-deductible. Leased or owned vehicles both qualify for depreciation deductions. However, depreciation on leased vehicles is strictly based off the residual value of the car when it is returned. This means you may require third-parties to estimate depreciation, or wait until the end of lease agreements to claim depreciation deductions. Choosing to lease a vehicle prohibits you from claiming deductions on vehicle depreciation.
Mileage requirements impacts the deductions you can claim, and the value you can obtain from specific deductions on leased vehicles. Deductions on vehicle expenses are calculated using two common methods, the standard mileage rate or by accumulation actual expenses. These calculation methods can apply to leased or owned vehicles. Standard mileage is often the preferred method. This calculation method provides a specific rate for every mile driven for business purposes. In 2019, the rate was 58 cents for every mile driven. For example, if you drove for 10,000 miles you would receive deductions of $5,800. However, your standard mileage claims are often restricted by lease requirements. Many leases prohibit you from putting more than 1,500 miles on a car a month. Less miles driven causes you to obtain less in deductions. Consider how mileage requirements impact your ability to deduct business leases from your taxes.
Dependent On Lease Structure
Whether you can claim deductions on your vehicle lease is also dependent on the structure of your lease. If your vehicle is treated like a leased vehicle, you can deduct the payments from your taxes as rent. In other cases, business leases will be a conditional sales contract. This requires you to pay towards the title and other assets to eventually purchase the vehicle outright. If your lease is set up like a conditional sales arrangement, you must depreciate costs throughout the course of the lease. Consider your lease structure before claiming deductions on your leased vehicle.
Leasing vehicles is becoming a popular alternative to traditional ownership amongst business owners. Some owners are still unsure if a car lease is a smart business move. However, you must consider how vehicle leasing impacts your eligibility for tax deductions. There are limited vehicle exceptions to be claimed for deductions. These restrictions most notably extend to luxury vehicles. Leasing restricts deductions on depreciation and may impact your deductions based on lease mileage requirements. Furthermore, your ability to claim is also based on the lease structure you agreement is built on. Consider the points mentioned above if you are wondering if your business car lease meets tax deduction requirements.