Leasing a new car has become a popular alternative to buying one. Lease fees usually are far lower than car loan payments and usually include some maintenance. You also can negotiate lease payments and terms more flexibly than you can loan fees and interest. After three or five years, you can exchange the leased care in for another new one. However, you won't get any major tax deductions on a car you lease unless you use it in business. Check out all the rules and options before you decide whether to lease or buy.
Deductions for Business
You can deduct lease payments on a car you use for business, but with some catches. If you use the car 100 percent for business, you can deduct the entire monthly payment. However, if you drive that same car for personal use, you have to adjust the deduction. You can only deduct the percentage used for business. You'll have to keep track and document business and personal miles.
Down Payment Rules
Any down payment on a car lease for business is also deductible, but not all at once. You have to spread that down payment over the life of the lease. If you pay $5,000 up front to lease a car for five years, for instance, you can only deduct $1,000 a year. Those upfront payments also may reduce your monthly payments. This will affect the deductions, which also must be adjusted for personal use.
State Sales Taxes
You get tax advantages in some states with sales taxes on lease payments even on personal cars. Sales taxes typically are deductible from federal taxes. You'll have to check your state's sales tax rules and federal tax rules on including lease taxes in deductions for general sales taxes. Some states charge sales taxes on monthly rental fees. However, Arkansas, Maryland, Minnesota, Texas and Virginia charge sales taxes on the entire sale price, so you might qualify for a larger deduction on the first year of the lease in these states
If a lease breaks out a percentage of the fee for interest, you might be able to deduct that, even on a personal car lease. You'll have to track this and provide interest records. When you deduct mileage for a leased car used for business, you'll have to use the standard mileage deduction for the length of the lease.
Bob Haring has been a news writer and editor for more than 50 years, mostly with the Associated Press and then as executive editor of the Tulsa, Okla. "World." Since retiring he has written freelance stories and a weekly computer security column. Haring holds a Bachelor of Journalism from the University of Missouri.