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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 Written by Rhys Subitch Edited by Auto loans editor Rhys has been writing and editing for Bankrate since the end of 2021. They are passionate about helping readers gain the confidence to take control of their finances by providing clear, well-researched information that breaks down complicated topics into manageable bites. The Bankrate promise

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We receive compensation for the promotion of sponsored goods andservices or by you clicking on certain links posted on our website. Therefore, this compensation may influence the manner, place and in what order products appear within listing categories, except where prohibited by law for our mortgage, home equity and other products for home loans. Other factors, such as our own website rules and whether or not a product is available in your area or at your personal credit score could also affect the way and place products are listed on this website. Although we try to offer an array of offers, Bankrate does not include specific information on every credit or financial product or service. As a business owner you likely need to put more thought into whether you should purchase or lease your vehicle as opposed to the typical driver. All the standard questions to ask whether to lease or buy take place, but there’s an additional factor — namely, which are tax benefits? Tax deductions for business vehicles When you use a vehicle for business there are two methods accepted by the IRS to deduct the costs on your tax returns for federal taxpayers. You may use what’s known as the standard mileage deduction, or choose to take advantage of the actual expenses deduction. It is possible to switch from standard to actual expense year-to- year for a purchased vehicle, but you must stay with what you first pick when leasing. Mileage deductions The standard approach allows you to claim miles driven by your company on your federal tax returns. The IRS sets the standard mileage rates that will be utilized to calculate the deductible cost of operating a car business purposes each year. In 2022, the standard mileage rate of 58.5 cents per mile for business purposes. That means that if you travel 15,000 miles for your business, you can claim a deduction of up to $8,775. Lease payments You may deduct the cost of lease payments per month taking the expense deduction in the federal taxes you file. The amount of allowance for lease payments is contingent on the amount of time you drive the car exclusively for business. For example, if your monthly lease payment is $400 and your vehicle is used at least 50 per cent of the time to work, you can claim $200 per month as an expense. This benefit is only available if you sign a standard lease. You cannot get a tax deduction from the federal government for lease payments made monthly if you take on a lease-to-own contract, meaning you will own the vehicle at the time of contract expiration rather than returning the vehicle to the dealer. Depreciation Only cars purchased are eligible for the depreciation deduction — and only when you actually use the deduction used. The method used to determine how much your car depreciated throughout the year is typically Modified Accelerated Cost Recovery System (MACRS). Like the mileage deduction, depreciation deduction changes every year. The deduction for 2021 was highest amount you could deduct was $10,200 There are alternatives to increase the amount dependent on the date the vehicle was placed in service. It is recommended to review the IRS to become familiar with the various ways to reduce the value of your vehicles and other property as an owner of a business. Operating and maintenance expenses expense rules also include the deduction of other expenses such as oil, gas repair of vehicles, and tire purchases for your leased or purchased vehicle. If your vehicle needs major repairs or maintenance due to business use, keep careful note of it. So, you’ll know precisely what you paid for and how much your business could reduce tax costs during tax season. Expense differences between purchased and leased vehicles The up-front costs can be much lower when leasing a vehicle that is the same model, make, model and year compared to buying it. As a business owner you can use those savings to be used to fund other investments and needs of the business. Provided you know you will adhere to the lease terms for wear and tear and the expected mileage, you could discover that the lower payment can yield more money for your business. If you are comparing the same vehicle with a lease or acquisition, monthly installments as well as first down payments may be lower for a lease. There may be a reduction in maintenance costs in the event that your lease includes routine maintenance services, for example, oil replacement. Purchasing has advantages in the fact that you’ll eventually own the vehicle, while leases have to be terminated at some point, and your business is left with no equity. The cost of early termination when you need to end the lease early, and excessive mileage fees incurred if you exceed the limits on mileage could cause significant expenses in the case of leases. Both options are subject to additional fees and interest which means that it is dependent on what your company’s needs to make use of the vehicle. Should you buy or lease a business vehicle? Tax benefits could be only one of the considerations to consider for owners of businesses. The bottom line is that a vehicle purchase or lease is a big cost for your company take a look at the problem from all angles prior to committing. Lease contracts usually limit the number of miles a car can be driven up to 10 or 20 miles annually. If you go over the limit, you may be subject to a fine of between 10 and 50 cents for each additional mile. If you drive a great deal for your company then purchasing a vehicle may be the right choice. Also, the car must remain in good order. If you don’t keep on your side of the contract or if there’s an excessive amount of wear on the vehicle at the time of return the car, you may face additional charges. It’s also worth bearing in your mind that if you continue to lease a car one after the other it will be a constant monthly car payments, unlike when you purchase a vehicle and then own it completely. However, if you like having access to the most recent cars with the most advanced technology features available and available, leasing a car could be an option to accomplish this, and allow you to purchase a new vehicle every three years or so. In addition, because leasing payments are typically cheaper than a conventional car loan and you can in a position to purchase a luxury vehicle. The bottom line is that, like many aspects of running your company, there isn’t a one size fits all answer when it comes to if a lease or buying offers tax benefits. Take into consideration how the vehicle is used, the upfront expenses, the cost of long-term maintenance and potential added fees and the variety of deductions you might be eligible for before you purchase the right vehicle for your company. 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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 The article was edited by Rhys Subitch Edited by Auto loans editor Rhys has been editing and writing for Bankrate since late 2021. They are dedicated to helping readers gain the confidence to control their finances through providing clear, well-researched information that breaks down complicated topics into manageable bites.

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