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
each lease payment as a rental expense. However, when
business use of a leased vehicle is less than 100 percent, the
rental deduction is scaled down in proportion to the personal
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
Moreover, if a vehicle with a fair market value in excess of
approximately $15,500 (for 2001) 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
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).
Let's say that in April of 1999 you leased a
new car valued at $20,350 to use in your
business. In 2000, your business usage was 75%
and you had the car for the entire year. When
computing your inclusion amount for 2000, you
would use the table for cars first leased in
1999, and the column marked "2nd"
since this is the second year of your lease.
Reading across the line for cars valued
between $20,000 and $20,500, the dollar amount
is $68. Since you had the car for all of 2000,
use 100% of the amount (otherwise you would
multiply by a fraction, x/365, where x = the
number of days you leased the car). Then
multiply $68 by 75%, your percentage of business
use, to arrive at an inclusion amount of $51.
This amount should be subtracted from 75% of
your total lease payments to arrive at the
amount you can deduct.
Optional standard mileage rate. Note that if you are
leasing your car or truck, as of 1998 you can elect to use the standard
mileage rate to compute your auto expenses, provided that
you use this method for the entire period of the lease. If your
lease began before 1998, you would need to use the SMR for the
remainder of the lease term.