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Tax advantages of leasing vs. buying a car Advertiser Disclosure Advertiser Disclosure We are an independent, advertising-supported comparison service. Our aim is to assist you make better financial choices by offering you interactive tools and financial calculators, publishing original and objective content. This allows you to conduct your own research and compare information at no cost and help you make financial decisions with confidence. Bankrate has partnerships with issuers such as, but not limited to, American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Make Money The products that are featured on this site are from companies who pay us. This compensation can affect the way and where products appear on this website, for example for instance, the sequence in which they be listed within the categories of listing in the event that they are not permitted by law for our mortgage or home equity products, as well as other home lending products. However, this compensation will have no impact on the information we publish, or the reviews you see on this site. We do not include the vast array of companies or financial deals that could be available to you. SHARE: andresr/Getty Images

4 min read Published June 14, 2022

Written by Mia Taylor Written by Contributing Writer Mia Taylor is a contributor to Bankrate and an award-winning journalist who has two decades of experience and worked as a staff reporter or contributor for some of the nation’s leading newspapers and websites including The Atlanta Journal-Constitution, the San Diego Union-Tribune, TheStreet, MSN and Credit.com. The article was edited by Rhys Subitch Edited by Auto loans editor Rhys has been writing and editing for Bankrate since late 2021. They are passionate about helping readers gain the confidence to control their finances through providing concise, well-studied information that breaks down complicated topics into manageable bites. The Bankrate promise

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If you have questions about money. Bankrate has answers. Our experts have been helping you manage your finances for more than four decades. We continually strive to provide our readers with the professional advice and tools required to be successful throughout their financial journey. Bankrate follows a strict standard of conduct, so you can rest assured that our information is trustworthy and reliable. Our award-winning editors and reporters produce honest and reliable information to assist you in making the right financial decisions. The content created by our editorial staff is objective, factual, and not influenced through our sponsors. We’re transparent regarding how we’re capable of bringing high-quality information, competitive rates and useful tools to you by explaining how we earn our money. Bankrate.com is an independent, advertising-supported publisher and comparison service. We are compensated in exchange for placement of sponsored products andservices or through you clicking certain links posted on our website. So, this compensation can impact how, where and when products are listed in the event that they are not permitted by law. This is the case for our loan products, such as mortgages and home equity and other products for home loans. Other elements, such as our own website rules and whether or not a product is available within your area or at your own personal credit score may also influence the manner in which products are featured on this site. We strive to provide an array of offers, Bankrate does not include details about every financial or credit product or service. If you are a business owner, you’ll likely have to give more thought into the decision to buy or lease your vehicles as opposed to the typical driver. All the standard questions that you have to answer about whether you should lease or buy come into play, but there’s a second factor to consider which is: what are the tax advantages? Tax deductions for vehicles used by businesses If you’re using a car to conduct business, there are two approaches allowed from the IRS to deduct the expense on the federal tax form. You may use what’s known as the standard mileage deduction, or opt to use the deduction for actual expenses. It is possible to switch between the standard and actual expense from year to an year with a car you have purchased, but you must stay the same vehicle you initially chose when leasing. Mileage deduction : The standard mileage method allows you to claim miles driven by your company on your federal tax returns. The IRS releases the standard mileage rates that is used to calculate the tax-deductible costs of running a vehicle for business purposes every year. The rate for 2022 of 58.5 cents per mile driven for business purposes. If you travel 15,000 miles for your business, you can claim a deduction of up to $8,775. Lease payments You can deduct the cost of monthly lease payments by making use of the actual expense deduction in those federal tax return. The specific amount of the lease payment deduction is contingent on the amount you use the car exclusively for business purposes. If, for instance, your monthly lease payment is $400 and the vehicle is used at least 50 percent of the time for business, you can claim $200 per month to cover expenses. This benefit is only available if you sign on to an ordinary lease. You are not able to claim an income tax deduction under the federal tax code on monthly lease payments when you sign a lease-to-own contract, meaning you’ll own the car at the time of contract expiration rather than needing to return the car back to the dealership. Depreciation Only vehicles purchased qualify to deduct the cost of depreciation and only when an actual deduction for expenses is taken into consideration. The method for determining the amount your car has depreciated throughout the year is typically Modified Accelerated Cost Recovery System (MACRS). Like the mileage deduction, depreciation deduction changes every year. In 2021, the maximum amount you could deduct was $10,000 however, there are ways to increase this figure based on when the vehicle entered service. You should review by the IRS to familiarize yourself with the various ways to depreciate your vehicle and other assets as a business owner. Maintenance and operating expenses Actual cost rules also allow for the deduction of any other expenses like gas, oil changes, vehicle repairs and tire purchases for your newly purchased or leased vehicle. If your vehicle requires urgent repairs or maintenance for business reasons be sure to keep a detailed track of the expenses. So, you’ll know exactly how much you spent — and how much your business could reduce tax costs during tax season. Cost differences between the purchase and lease vehicles. The initial cost can be much lower when you lease a car that is the same model, make, model and year compared to buying it. If you are a business owner the savings could be redirected to other business needs and investments. If you are certain that you will remain within the lease conditions for wear and tear as well as anticipated mileage, you might discover that the lower payment can yield more cash for your business. If you are comparing the same vehicle as a lease versus a purchase, the monthly payments as well as first down payments could be lower when you lease. There may be a reduction in maintenance costs if your lease covers the cost of routine maintenance services, for example, oil changes. Purchasing wins out when it comes to the fact that you will eventually own the vehicle however leases will have to expire eventually, and your company is left with no equity. Costs for early termination if you need to end the lease early, and excessive mileage fees incurred if you exceed the limits on mileage could cause significant expenses with leases. Both of these options have charges for interest and other charges, so ultimately, it’s all about the way your company will require to utilize the vehicle. Should you buy or lease a business vehicle? Tax benefits could be just one aspect that business proprietors must consider. In the end, a car purchase or lease can be a significant expense for your company and you should consider the issue from every angle before making a decision. Lease contracts usually limit the number of miles that a vehicle can be driven to 10,000 or 20,000 miles annually. When you go beyond the limit, you may have a penalty of between 10 and 50 cents for each additional mile. If you drive a great deal for your company, buying a car may be the right choice. It is also required that the vehicle be kept in good condition. If you fail to meet up with the contract or if there’s an excessive amount of wear on the vehicle at the time of return you could face additional costs. It’s also worth bearing in your mind that if you continue to lease one car after another and you’ll always be required to pay monthly payments for your car, in contrast to when you purchase a car and eventually own the car in full. On the upside, if you are interested in having access to the latest cars with the most advanced technological features in the market, leasing a car can be a way to do this, allowing you to access a new car every three or four years. Furthermore, since lease payments are generally cheaper than a conventional car loan and you can in a position to purchase a luxury car. The bottom line As with many aspects of running your business, there’s not a one-size-fits-all answer in determining if leasing or purchasing a car offers tax benefits. Think about how the car will be used, as well as upfront expenses, the cost of long-term maintenance and any additional fees that could be incurred and the variety of deductions you might get before purchasing an automobile for your business. Discover more SHARE:

Written by Contributing Writer Mia Taylor is a contributor to Bankrate and an award-winning journalist who has two decades of experience and worked as a staff reporter or contributor for some of the nation’s leading newspapers and websites including The Atlanta Journal-Constitution, the San Diego Union-Tribune, TheStreet, MSN and Credit.com. The article was edited by Rhys Subitch Edited by Auto loans editor Rhys has been editing and writing for Bankrate since the end of 2021. They are passionate about helping readers gain confidence to take control of their finances through providing clear, well-researched information that breaks down complicated subjects into digestible chunks.

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