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Your Business Car Lease Is Tax-Deductible (Here Is How to Claim It)
If you lease a vehicle for business use, the IRS allows you to deduct those lease payments as a business expense. This is one of the simplest and most straightforward vehicle tax deductions available, and it can save you thousands of dollars per year.
But there are rules about what you can deduct, how much, and what documentation you need. Here is the complete guide.
The Two Methods for Deducting Vehicle Expenses
Method 1: Actual Expense Method
With the actual expense method, you deduct the real costs of operating the vehicle, proportional to your business-use percentage. This includes:
- Lease payments
- Gasoline and charging costs
- Insurance premiums
- Maintenance and repairs
- Registration and license fees
- Parking fees and tolls
- Car washes (yes, really)
If your total vehicle expenses for the year are $12,000 and you use the car 80% for business, your deduction is $9,600.
This is the only method available if the lease is in your business name (LLC, S-Corp, etc.). It is also typically the better method for leased vehicles because the lease payment itself is a significant deductible expense.
Method 2: Standard Mileage Rate
The standard mileage rate lets you deduct a flat amount per business mile driven (the IRS adjusts this rate annually). For 2026, check the current rate on the IRS website.
This method is simpler (no need to track individual expenses), but it is only available if you lease the vehicle in your personal name and choose this method in the first year of the lease. Once you choose a method, you must stick with it for the entire lease term.
For most business owners who lease through their business entity, the actual expense method is the default and often produces a larger deduction.
How to Calculate Your Deduction
Step 1: Determine Your Business-Use Percentage
Track every business mile you drive with a mileage log. At the end of the year, divide business miles by total miles to get your percentage.
Example: 18,000 business miles / 24,000 total miles = 75% business use.
Step 2: Add Up Your Total Vehicle Expenses
Include lease payments, fuel, insurance, maintenance, registration, and all other vehicle costs for the year.
Example: $7,200 (lease) + $2,400 (gas) + $1,800 (insurance) + $600 (maintenance) = $12,000 total.
Step 3: Apply the Business-Use Percentage
$12,000 x 75% = $9,000 deduction.
Step 4: Subtract the Lease Inclusion Amount (If Applicable)
For vehicles with a fair market value above a certain threshold (updated annually by the IRS), you must reduce your deduction by a small "lease inclusion amount." This prevents taxpayers from using leasing to avoid the depreciation caps that apply to purchased vehicles. The inclusion amount is typically modest, ranging from a few hundred to a few thousand dollars per year depending on the vehicle's value.
What You Need to Document
The IRS requires "contemporaneous" records, meaning you need to track your mileage as it happens, not reconstruct it at tax time. Acceptable documentation includes:
- A mileage log app (MileIQ, Everlance, Stride)
- A paper logbook kept in the car
- A spreadsheet updated weekly
For each business trip, record: the date, destination, business purpose, and miles driven. For expenses, keep receipts or use a dedicated business credit card that creates an automatic paper trail.
Common Scenarios
Self-Employed / Sole Proprietor
You deduct vehicle expenses on Schedule C of your personal tax return. You can use either the actual expense method or standard mileage rate (if the lease is in your personal name). The deduction reduces your self-employment income, saving you both income tax and self-employment tax.
LLC Owner
If the LLC is the lessee, use the actual expense method. The deduction flows through to your personal return (for single-member LLCs) or the partnership return (for multi-member LLCs).
S-Corp Owner/Employee
The S-Corp deducts the lease payments directly on its corporate return. If you use the vehicle for personal driving, the personal-use value must be reported on your W-2. Alternatively, the S-Corp can reimburse you for business use under an accountable plan, and you lease the vehicle personally.
Mistakes That Trigger Audits
- Claiming 100% business use on a vehicle that is your only car (the IRS finds this unlikely)
- No mileage log or reconstructed records created at tax time
- Inconsistent business-use percentages year over year without explanation
- Deducting commuting miles as business miles (commuting is not deductible)
- Forgetting the lease inclusion amount on higher-value vehicles
How Leasing Compares to Buying for Deductions
Leasing offers a cleaner, more predictable deduction than buying. With a purchase, you deal with depreciation schedules, Section 179 limits, and potential recapture if business use drops below 50%. With a lease, you simply deduct the payment each month, and when the lease ends, so does the deduction, with no strings attached.
For a detailed comparison of the tax math, read our lease vs. buy breakdown for business owners.
What Vantage Does Differently
We help business owners structure leases that maximize their tax position. We negotiate below-market lease payments (which increases your savings both on the payment and the deduction), and we work with leasing companies experienced in business leases.
We are not tax advisors, but we coordinate with your accountant to make sure the deal structure aligns with your tax strategy.
Get your free quote in under 5 minutes and mention your business entity type. We will tailor the lease structure accordingly. No spam. No pressure. Unsubscribe anytime.
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