Car Lease Tax and Credit Advantages

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November 9, 2016

In order to make your car lease tax deductible, it has to be used at least in part for business purposes. The leasing of an auto already has certain advantages over purchasing it, but you have to understand how the tax credits work in relation to the value of what you put into the car. Chances are, if you lease, you already know the value of your savings, so take some time to fully comprehend how you can use tax credits to your advantage.

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Lease vs. Purchase

Auto sales typically involve car finance whereby you, the borrower, receive a certain amount of money to purchase a car that you have to pay back with interest. The new car begins to lose value literally the moment you drive it off the lot, but you are obligated to pay back the entire amount of its previous worth plus interest. In one sense, this is a lose-lose situation. The car loses value while at the same time you are required to make full payments on it-for as long as 5 years! Leasing, on the other hand, is an arrangement that bases your monthly payment on the calculated depreciation of the car. In other words, the difference between the sticker price and the amount the car will be worth at the end of the lease is what you pay, divided up into monthly installments. The leasing company, of course, sets the end worth or residual value, but you still don't pay the whole price of the car.

On the other side, car leasing involves fees, charges and, in some cases, tax upon signing. Many of the same fees apply for car purchase as well. All of this added cost should be taken into consideration before you make your final decision.

Business Use

If you are considering your options for a car to be used for business purposes, even part time, leasing has many advantages that car purchase does not. When used for business, the depreciation of your leased vehicle is deductible on your annual tax form. The amounts change from year to year, so consult a tax specialist before you commit, but in general, the total amount you have paid on the lease in a year, plus gas and maintenance, is deductible. This requires a detailed and accurate time log of business car use, so make sure you distinguish clearly between the time you use the car for business and personal use. If both apply, a percentage of the total lease expense is deductible. For instance, if the car is used for business half of the time, you are allowed to deduct 50% of the cost.

Car leasing has implicit advantages over car purchase, but what is not so widely known is that the expense doled out for the lease payments, fuel and upkeep may be tax deductible if the car has business uses. It is worth taking some time and researching the possible tax credits of car leasing before you make the decision to purchase or lease a new car.

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