Leasing a car online is an excellent way for any driver to save the hassles of owning a car and save money — but business owners may be able to save a little more by writing off a leased car as a tax deduction.

A car lease tax deduction is an added incentive for a business owner to consider this option — but how much of a car lease can you write off, and what’s the best way to make the necessary calculations?

Here’s everything you need to know about business tax deductions for leased cars so that you know exactly where you stand if you’re considering this option compared with buying. Also, discover information on how to subscribe to a car - another tax-effective method of acquiring cars for your business.

Can you write off a car lease? 

Standard drivers cannot write off a leased car used for private mileage only. However, that changes if you’re a business owner using a car for a combination of private and work usage. If you drive your vehicle for business purposes, you can likely write off part of your lease.

Is your car lease eligible for write-off? 

There are many questions to ask before leasing a car but for business owners, one of the most important is whether you’re eligible to claim a tax deduction for your leased car. Leased cars qualify for a payment deduction in many circumstances. The IRS sets out clear regulations about the business use of a car and how it affects your tax position.

The bottom line is that if you use your leased car only for business purposes, you can deduct its entire cost of ownership and operation — subject to certain limits. If, however, you use the leased car for both business and personal purposes, you may deduct only the cost of its business use.

To be eligible for a car lease payment write off, you must be self-employed or a business owner. W-2 employees cannot itemize vehicle expenses, such as fuel costs, lease payments, and insurance, meaning that the expenses cannot usually be written off for an employee who drives a leased vehicle.

How much of a car lease can you write off? 

As per the IRS regulations, business owners and self-employed individuals can write off car lease payments for the “business use” portion of their vehicle usage — not the private portion of the usage. Most people combine business and personal usage of their vehicles so this is where your record-keeping skills will come in.

If you use your car 65 percent of the time for work and 35 percent of the time for driving the family around, heading to the golf course with friends, and shopping, you can only claim 65 percent of the usage and write off only that portion of the car lease payments on your tax return. Note that commuting to your place of work is not considered work usage.

Depending on how you calculate your business car lease write-off, you will need to keep records and maybe log your mileage to accurately claim the business usage portion of your overall usage. If you cannot back up your claims or try to fiddle with the numbers, you could be landed with an expensive IRS fine or worse. Always play by the rules.

How to calculate your business car lease write-off   

To calculate the write-off amounts for your business car, you’ll need to follow one of two methods permitted by the IRS:

1. Actual expenses method

The actual expense method allows you to itemize car-related expenses and determine what it actually costs to operate the car for your business use. Eligible expenses include fuel costs, oil, insurance, registration, licenses, maintenance, tires, repairs and depreciation (or lease payments) attributable to the business portion of the total miles driven.

Using this method, you deduct the portion of your car lease payments that relate to business. You will need to keep accurate records of all vehicle expenses and be able to demonstrate business-related usage.

2. Standard mileage rate method

With the standard mileage rate method, you must own or lease a car and calculate the cost of operating a vehicle per month using mileage records to establish an “average” usage. To apply this rate, you must choose to use it in the first year the car is available for use in your business. In subsequent years, you can use either this rate or the actual expense method outlined above.

You must not:

• Operate five or more cars at the same time (a fleet)
• Have claimed a depreciation deduction for the car or special depreciation allowance on the car
• Have claimed actual expenses after 1997 for a car you lease

According to the IRS, the standard mileage rate for 2023 is 65.5 cents though this rate varies each year. In 2023, if you drive a total of 30,000 miles of which 60 percent are for business, you could claim a total of $13,100 (20,000 x 65.5 cents). Importantly, car lease payments are not deductible if you choose the standard mileage rate method. Note that expenses such as parking fees and tolls (for business use) are separately deductible, regardless of the calculation method you use.

Which car write off method is better?

There is no definitive “best method” as it will depend on your usage of your vehicle. Many drivers qualify to use both methods. If that’s the case, you’re in the fortunate position of being able to calculate your deduction using both methods and, based on the final numbers, select the one that gives you a larger deduction.

Generally speaking, the most important factor in deciding which method to use is how often you use the vehicle. For drivers who cover large distances each week, the standard mileage deduction may be the most cost-effective method. 

However, a driver with normal mileage may benefit by using the actual expense method, which covers lease payments as well as fuel, insurance and other expenses. Remember, whichever method you select, the IRS expects documentation of all business claims and car lease payment write-offs are no exception.

Important note: you cannot change the method during the lease period

If you buy a car for your business, you can decide freely how to calculate the tax deduction from year to year. The same flexibility does not extend to leasing: you must use the same deduction method throughout the entire lease period. This makes it all the more important to get your calculations right and consider the pros and cons of each method at the beginning of the lease so that you select the most tax-effective method.

How to deduct sales tax on a car lease 

The way states apply sales tax on leased vehicles varies. In some states, you must pay taxes on the full amount of the vehicle upfront whether you buy or lease and even on the down payment on a car lease. In most states, however, you only pay taxes on monthly lease payments. 

You may be able to deduct sales tax on a leased car using the state and local sales tax (SALT) deduction. This allows you to deduct either property taxes and income taxes combined or state and local sales taxes — but not both. You will need to choose one or the other for your business and the upper limit on the amount you can claim is $10,000 (at least until 2025).

If you itemize deductions, you may be able to benefit from a tax perspective but, again, you'll need to maintain accurate records of all the sales and local taxes paid throughout the year (including on your lease). You’ll also need to calculate sales tax to see whether you’d be better off with the standard deduction instead of itemizing.

Consider your business car options…

Leasing a car can help you avoid many of the hassles of owning a car outright and minimize the costs of acquiring a car (no concerns about depreciation or repairs). That said, there are many costs involved in buying or leasing a car. When leasing, you need to factor in the ongoing monthly lease payments, vehicle insurance, repairs and maintenance, personal property taxes, registration and inspection fees.

Business owners need to understand all of these costs in full – as well as how best to write expenses off as a tax deduction. To do this, consider carefully how you will use the car, do some “dummy” calculations and decide on the best method for calculating deductions. Only then can you make an informed decision. And, talking of making an informed decision, did you know that there’s a third option available to you other than leasing or buying?

Another money-saving option for business cars...

A FINN car subscription provides a highly convenient option for business cars. It has similar tax benefits as leasing but provides greater flexibility with the cars you drive as you’re not locked into lengthy contracts.

Your flexible car subscription can be approved in minutes, doorstep delivery can be arranged and insurance, registration, maintenance and roadside assistance are all taken care of — with zero down payment necessary. Talk to a FINN representative today about a car subscription for your business.