Sharon Gross CPA

Federal: Tax Benefits of Leasing vs. Owning a Business Vehicle

When choosing between leasing or purchasing a vehicle for business purposes, federal tax treatment plays a major role in which path delivers the greatest benefit. Both options allow for significant deductions, but the rules governing those deductions especially depreciation limits, Section 179 eligibility, and luxury vehicle caps vary greatly between ownership and leasing.

Leasing a Vehicle: Simpler, Steady Deductions

Leasing a vehicle provides a straightforward approach to deductions. The IRS allows you to deduct the portion of the lease payment that corresponds to your business use. For example, if you use the vehicle 75% of the time for business, then 75% of the lease payments plus associated operating expenses can be deducted.

• Lease payments are considered an ordinary business expense and are deductible each year.
• However, if the vehicle has a fair market value above IRS limits (a "luxury vehicle"), you must reduce your deduction using the IRS Lease Inclusion Table.
• Since you're not claiming depreciation, you avoid the recapture rules applied to owned vehicles upon sale.

Owning a Vehicle: Depreciation and Section 179

Purchasing a vehicle offers substantial upfront deductions, particularly under Section 179 and bonus depreciation rules. For 2024, businesses may expense up to $1,220,000 under Section 179, with phase-outs beginning at $3,050,000 in total asset purchases. However, luxury auto limits apply to passenger vehicles that weigh under 6,000 lbs.

• Passenger cars: Limited to $20,200 in first-year depreciation (with bonus depreciation).
• Heavy SUVs (over 6,000 lbs GVWR): Qualify for full Section 179 expensing up to the annual cap.
• Actual expenses (gas, maintenance, insurance) or IRS mileage rate (67 cents per mile in 2024) can also be deducted based on business use.

Ownership also allows you to build equity in the asset and potentially recover more value through resale but this may trigger depreciation recapture that is taxed as ordinary income.

Which Option Is Right for Your Business?

If you value predictability, low upfront costs, and drive fewer miles, leasing may provide consistent deductions without depreciation limits. If you're looking to maximize upfront tax savings, own your asset, or use a heavier vehicle (like an SUV or truck), buying may unlock greater long-term deductions.

Each option has trade-offs, and the best choice depends on your cash flow, vehicle usage, and tax position. Consulting a CPA ensures that you align your vehicle strategy with your overall tax plan and avoid IRS red flags.