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Do You Get A Tax Credit For Leasing A Car?

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Are there tax benefits of leasing a car vs buying a car? Car leases are included in the IRS’s list of qualified tax deductions on vehicles. That makes car leasing very attractive for both business owners and self-employed.

This is contradictory to the popular belief that car tax deductions only apply to owned vehicles. The Internal Revenue Service (IRS) treats leased vehicles the same as owned vehicles to claim depreciation and other business-related expenses on your tax return.

The Tax Cuts and Jobs Act of 2017, however, put new limits on the amount of depreciation that can be claimed on leased cars and trucks placed in service after December 31, 2017. The new limits are:

  • $10,000 for the first year
  • $16,000 for the second year
  • $9,600 for the third year
  • $5,760 for the fourth and later years

For passenger autos (including trucks and vans) that are acquired before September 28, 2017, and placed in service before January 1, 2018, the old depreciation limits continue to apply.

The new depreciation limits do not apply to vehicles used for business purposes that are not passenger autos, such as off-road vehicles, trucks, vans weighing over 6,000 pounds, and certain other vehicles.

If you’re a small business owner or self-employed and you’re thinking of leasing a car for business purposes, be sure to talk to your tax advisor to see if it makes sense for you.

How much can you write off on a leased vehicle?

Most leasing companies require that lessees make a “capitalized cost reduction” (CCR), which is a down payment of sorts. The CCR can be any amount but is typically equal to the first monthly payment, plus taxes and fees.

The CCR is not deductible in the year it’s paid. Rather, it’s deducted over the life of the lease as part of the “depreciation” deduction.

For example, if you lease a car with a CCR of $3,000 and you elect to deduct $5,000 of depreciation each year for five years, your total deduction for the CCR would be $500 per year ($3,000 divided by six).

If you’re a small business owner or self-employed and you’re thinking of leasing a car for business purposes, be sure to talk to your tax advisor to see if it makes sense for you.

Other deductible expenses for leased vehicles:

  • Gasoline
  • Maintenance and repairs
  • Tires
  • Insurance
  • Registration fees
  • License plates

If you use your leased vehicle for both business and personal purposes, you can only deduct the portion of these expenses that are related to business use.

For example, if you drive your leased vehicle 10,000 miles in a year and 5,000 of those miles are for business purposes, you can deduct 50% of your gasoline expenses.

The same applies to maintenance and repairs, tires, insurance, registration fees, and license plates.

Are there tax credits for leasing electric vehicles?

The answer is no, there are no tax credits for leasing electric vehicles. The credit only applies when you purchase or lease a new EV.

However, you may be eligible for state and local incentives. Many states offer tax rebates, grants, or both when you buy or lease an EV. Some states also offer reduced registration fees, free parking, and access to HOV lanes.

To find out what incentives are available in your state, visit the Department of Energy’s Alternative Fuels Data Center website and select your state from the map.

Does The $7,500 Tax Credit Work On a Car Lease?

No, the $7,500 tax credit for electric vehicles does not apply to car leases. The credit only applies when you purchase or lease a new EV. This tax credit is often advertised as a discount on the EV’s actual price.

Similarly, this government policy is designed to help make EVs more affordable for consumers. The credit is applied against the income tax that you owe for the year in which you purchase or lease the EV.

For example, if you purchase an EV in 2018 and you owe $10,000 in federal income taxes for the year, the $7,500 tax credit would reduce your tax bill to $2,500.

However, you may be eligible for state and local incentives. Many states offer tax rebates, grants, or both when you buy or lease an EV. Some states also offer reduced registration fees, free parking, and access to HOV lanes. 

If you have any questions about the EV tax credit or how it works, be sure to speak with a qualified tax professional.

Is there a car lease tax deduction for the self-employed?

Are you a self-employed individual that leases a vehicle? You can submit a report about your business income and other expenses on Schedule C when you file your Form 1040. This means that you’re entitled to tax benefits when you lease a vehicle compared to buying one.

Likewise, one of the most significant tax benefits when leasing a car for your business is the reduced lease payments set by the IRS. Typically, you’re allowed to reduce your lease payments in full. Likewise, if you’re using a leased car for personal use, allocate your lease payments depending on your use of the vehicle for business purposes.

Other Known Tax Benefits of Leasing a Car

When you lease a car, the leasing company pays the sales tax on the vehicle, which could save you hundreds of dollars, depending on the state in which you live.

In addition, if you’re leasing a car for business purposes and you use it for personal travel, you can deduct the portion of your lease payments that are attributable to business use.

For example, if you lease a car for $400 per month and you use it for business travel 50% of the time, you can deduct $200 per month from your taxes.

In Conclusion

When it comes to car leases, there are a few key things to remember come tax time. First, the $7,500 electric vehicle tax credit does not apply to leased cars. Second, if you’re self-employed, you can take advantage of the reduced lease payments set by the IRS.

Lastly, if you’re leasing a car for business purposes, you can deduct the portion of your lease payments that are attributable to business use.

As always, be sure to speak with a qualified tax professional if you have any questions about how leasing a car could impact your taxes.

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