Tax Benefits of Leasing a Car vs. Buying a Car for Business

Most people are familiar with leasing and buying as two sides of the same coin. Regarding business, these two options have slightly different ramifications, especially at tax time. 

Leasing

Any car leasing deal includes a consistent monthly payment most businesses can budget for. Leasing allows business owners to drive newer cars without the capital costs of purchasing such a car. Depending on your lease terms, you can also avoid maintenance costs if the vehicle is under warranty. You can trade your car in for the latest model when the lease ends. 

Though you can also claim tax benefits, the perks of leasing come with a few drawbacks for businesses. These include a lack of ownership and equity within the car. Business owners can’t customize leased vehicles, and sometimes leasing can cost more than buying a car outright. The perks of leasing and claiming tax benefits can also outweigh the overall costs when you do the math. 

Buying

The argument for buying a car for business depends on how long a lease on a car is and often you plan on keeping the car. Buying can be a better option if you want to keep the vehicle for longer than three or four years. You can claim tax benefits, including depreciation, and your overall costs are lower. You also have more control over mileage, pay less in fees than in a lease, and own an asset once you’ve paid off the loan. 

Businesses that own cars, however, carry the entire burden of caring for those vehicles. Cars depreciate over time, meaning the value of the business cars will also deteriorate, potentially faster than average. While you may be able to incorporate these costs into your taxes to your benefit, you’re still losing money on a depreciating asset. Disposing of this asset can bring additional tax benefits, but it’s often not worth the hassle.

How you use your business vehicle will determine the tax benefits you can claim. The Internal Revenue Service (IRS) recognizes two types of use: personal and business. You can claim a tax deduction if you use your car for business more than 50% of the time.

Personal use 

Personal use includes commuting and any other driving activities that aren’t business-related. For example, if you drive your business car to meetings and conferences but also use it to pick your kids up from school, the latter activity qualifies as personal use. 

Note that you must use a car for business purposes from the get-go. If you were using a vehicle exclusively for personal use and then incorporated it into your business, you cannot claim a business tax deduction. 

Business use 

If you use your car 100% for business use, you can deduct the total cost of ownership (buy) or operation (lease) from your taxes. Most people use their business cars for personal and business use. Claiming tax benefits for business use requires you to determine what percentage of the time you used that vehicle for business purposes. You can then use this percentage in your calculations based on whether you leased or bought the business vehicle.

Obtaining a short-term car lease for your business can help put you behind the wheel of newer models to impress your customers. In addition to trading in your leased vehicle, you can also claim the following tax benefits when you lease: 

• Actual expenses: Claiming this deduction requires you to keep track of every business-related car expense, like fuel, insurance, maintenance, car lease payments, and sales tax. The IRS requires that you deduct parking and toll fees on a separate form. 

• Standard mileage rate: This tax deduction is similar to the standard deduction individuals get on annual taxes. If you keep track of the miles you drove exclusively for business, you can use this rate to simplify your calculations come tax time. 

The IRS requires that you meet specific requirements to use the standard mileage rate. You must also use the same deduction throughout the life of the lease, so choose wisely.  

How to calculate car lease tax benefits

If you claim actual expenses, any business tax deductions appear on Form 1040 Schedule C: 

• Line 9: Fuel, repair, and insurance costs 

• Line 20a: Lease payments 

• Line 23: Lease sales tax 

If you choose standard mileage instead, you can calculate the miles you drove and multiply that by the standard mileage deduction for the corresponding tax year. For example, the IRS set 2023’s standard mileage rates at 65.5 cents per mile, so if you drove 10,000 business miles this year, your formula would look something like this: 

10,000 business miles x 0.655 per mile deduction = $6,550

A $6,550 tax deduction can help reduce your business tax burden.

Though you can’t claim depreciation if you lease a business vehicle, you can if you own the vehicle outright. You can also deduct interest if you only use the vehicle for business. The IRS requires that you use the standard mileage rate for the first year of ownership, but after that, you have the freedom to choose which method best suits your business. 

Most business owners claim the sales tax from car ownership as a business expense or a personal deduction. Business expenses are recorded on Schedule C, Line 9. Itemized deductions are listed on Schedule A.  

How to calculate car ownership tax benefits

Section 179, also known as the “Hummer Deduction,” details where you can write off the total purchase price of your equipment investment, including business vehicles. The IRS limits how much you can deduct based on when the car entered service and how long the vehicle has been in service. That limit was $11,200 if you put the car into its first year of service between January 1, 2022, and December 31, 2022. 

Cars in service before 2022 can also claim limited deductions. If you also drove your business vehicle for personal use, you can only deduct a percentage of your costs: 

Percentage of time driven for business X Costs = Tax deduction (up to $11,200 for 2022) 

You cannot claim your state income and sales tax deductions, so the IRS provides a handy sales tax deduction calculator to determine which works best for you.

If driving the latest model is integral to your business persona, leasing can help you achieve a sophisticated look without the price tag. You can lease a car with bad credit, which may help you to achieve the look you’re going for without paying out the nose in interest fees. However, when you determine how much it costs to lease a car for business, you might find purchasing one more cost-effective. 

Buying a car for business can also unlock the door to customization, unlimited mileage, and writing off depreciation. When you pay off the loan, you own the vehicle outright. You don’t have to worry about acquisition and disposition fees every few years, and if the business needs an influx of cash, you can sell the vehicles you own to make up the difference. 

Want to avoid the topic of taxes altogether? Consider a FINN car subscription that allows you to choose the car you want for a single monthly payment that only excludes fuel costs. Maintenance and depreciation are already integrated so that you can focus on the business at hand instead. When your subscription ends, simply choose a new vehicle to begin the process again