By: Lori T. Williams, Owner/Managing Attorney of Your Legal Resource, PLLC
If you’ve leased a vehicle this year and intend to write it off in your business, you may want to consult with a CPA to be sure you are properly following the IRS guidelines for this type of a deduction. CPA Sal Curcuru of Curcuru & Associates in Farmington, MI illustrates how to properly deduct a leased vehicle on your tax return.
Sal Curcuru, CPA
“When a taxpayer leases a vehicle and uses it in a trade or business, the taxpayer may deduct the lease expense based on the proportion that it is used for business,” says Curcuru.
For example, if a business owner uses her leased vehicle 80% for business, then she may deduct 80% of the lease payments as a business expense. Instead of deducting the lease payments and other operating expenses of the lease vehicle, taxpayers also have the option of using the standard mileage rate (55.5 cents per mile in 2012) for business miles.
Why can’t you deduct 100% of the vehicle?
- Even when a business owner travels a lot for his/her business, there is going to be some personal use of the vehicle and the IRS won’t allow the entire cost of the vehicle or lease to be written off.
- Additionally, the IRS is concerned about taxpayers buying luxury vehicles and taking business deductions for them. To combat this abuse, the IRS placed limits on how much a taxpayer can depreciate a luxury vehicle per year. The IRS defines a luxury auto as any vehicle priced over $16,000. When a taxpayer leases a luxury vehicle, he will have to reduce the lease expense by a lease inclusion amount that is based on the fair market value of the vehicle. The lease inclusion amount applies to vehicles that are leased for more than 30 days. Taxpayers who use the standard mileage rate to deduct leased auto expenses do not have to reduce their auto expenses by the lease inclusion amount.
How do you calculate the lease inclusion amount?
- The fair market value of the vehicle must be determined. The fair market value is equal to the capitalized cost of the auto if that figure is specified in the lease agreement. If the capitalized cost is not specified in the lease agreement, the taxpayer may refer to a publication such as Kelley Blue Book to determine the fair market value of the auto.
- Example 1: John begins a lease on a Buick Regal during 2012. John uses the vehicle 100% for business. His lease payment is $300 per month and the capitalized cost in the lease agreement is $30,000. John’s lease expense for 2012 is $3,300. The lease inclusion amount for 2012 based on a $30,000 fair market vehicle is $9. Therefore, John lease expense for 2012 is $3,291 ($3,300 lease payment less $9 lease inclusion amount).
- Example 2: Same as above, except that John uses the vehicle 80% for business. John’s lease expense is now $2,640 ($3,300 lease payment times 80% business use). His lease inclusion amount is $7.20 ($9 times 80% business use). His lease expense for 2012 is therefore $2,632.80.
For more information about leased vehicles or other accounting questions, contact Curcuru & Associates CPA PLC. Services include small business accounting, tax planning, QuickBooks, advice for new businesses/startups, Incorporation, and IRS problem resolution.
