If you lease a car that you use primarily for your business, then you see it as a business expense. For fleet managers, lease costs are even more obviously a business expense.
So, is leasing a car tax deductible? Let's find out.
Is Business Use of a Car a Deductible Expense?
The basic answer to this is yes. However, you can only deduct the use of the car that is directly for business. So, if you drive to a conference or to check out a site, that's deductible. If you use your car to go to Costco to get printer paper for the office, also deductible.
However, you can't deduct any personal use of the car. The IRS has long held that commuting costs are a personal expense, even if you are doing something other than just commuting, such as moving supplies from home. Travel between clients is still deductible and if somebody works entirely at home, they may be able to deduct mileage from traveling to work for a quarterly business.
This means that while fleet managers who supply cars only for business trips can deduct the entire cost of a lease, especially if they are using a fleet leasing system to handle seasonal needs, business owners cannot.
If you lease a car for an employee to use, you must require them to keep good records or that they use the car only for business (which is nearly impossible if they have to commute). They might also have to pay taxes on any personal use.
How Should You Deduct a Lease?
There are two basic ways to deduct expenses on a car used in business, and you can only use one of them. They are:
- Record the business miles driven and deduct the standard mileage rate.
- Claim actual expenses, including lease payments. This requires working out what percentage of the use is business and doing the math.
Whichever method is chosen must be used for the entire lease period. Many lessors find that standard mileage is by far the easiest way to deduct lease expenses (this also works for owned vehicles). This method also works if business use of the vehicle is very occasional.
For example, if you drive to an annual meeting once a year and this is the only time you use your car for business purposes. However, actual expenses can work well if the majority of the use of the vehicle is for business.
However, the IRS does not allow standard mileage to be used for fleet operations, which they define as five or more cars. Fleet managers must use the actual expense method. (Despite this, many fleet managers do benefit from leasing cars rather than buying).
If you don't allow any more than incidental personal use of fleet vehicles, you can deduct the entire lease payment. Incidental use would include, for example, stopping for lunch on the way from one client to another.
As a note, employees can no longer take a deduction for any driving expenses that are not reimbursed by the company. This means that reimbursing standard mileage is a perk for the employee and a tax break for you. Not doing so leaves your employee entirely on the hook.
One of the best ways to make deducting a lease easy for fleet managers is to use a fleet leasing contract. Fleet leasing allows you to deduct the lease payments (you cannot deduct auto loan payments), and you may even be able to sign a contract that includes maintenance and repair as well as replacing vehicles regularly. To find out how fleet leasing can help your business, contact Wilmar, Inc. today.