Can You Write off a Leased Car? Your Tax Questions Answered

It's a critical practice to take advantage of every deduction you're entitled to in pursuit of a minimal tax burden. Deductions are available if you drive for a living or use your vehicle to support your small business. But what if you don't own the vehicle you operate— are self-employed individuals and other entrepreneurs able to write off expenses associated with operating a leased car?

Use this blog to learn whether leased vehicles qualify for tax deductions and other critical information every small business owner and entrepreneur should consider.  

Can You Write Off a Leased Car?

There are write-offs that self-employed individuals and entrepreneurs who use a leased vehicle for their businesses can take advantage of. Typically, qualifications set by the IRS must be met to claim a write-off successfully. It's a best practice to retain paperwork and other documentation that supports the write-offs you'll claim, such as a mileage log.

Unlike small business owners, W-2 employees cannot write off car expenses related to a vehicle they lease. However, employers will sometimes reimburse employees who use personal vehicles for business tasks, such as picking up supplies. 

Taxes, Tax Write-Offs and Car Leases

While self-employed individuals and entrepreneurs can take advantage of write-offs related to their leased vehicles, there are limits. For example, write-offs don't apply to vehicles when used for personal purposes. If the vehicle is used personally and professionally, you can write off expenses related to that business use. Retaining records, receipts, and other supporting documentation is essential when writing off costs associated with this type of dual operation.

You can also write off expenses for a vehicle used exclusively for business purposes. 

Leasing an Electric Vehicle

While the Inflation Reduction Act created a path to claim a $7,500 tax credit for leased electric vehicles, business owners and entrepreneurs don't typically benefit. The credit for leased electric vehicles applies to the entity leasing it to your business.

While the $7,500 tax credit for electric vehicle purchases may go away, it's still available in early 2025 if you meet stringent criteria, including pricing standards and battery sourcing requirements. The vehicle must also be made in North America. Certain states – California in particular – have additional standards for electric vehicle ownership. To qualify for California's electric vehicle tax credit, you must plan to own the vehicle for at least 30 months.

Standard Lease vs. Lease to Own

If you lease a vehicle for your business, you can deduct monthly lease payments via the actual expense method. The amount you can deduct depends on the percentage the vehicle is used for business activities. You are unable to deduct lease payments if you've entered into a lease-to-own contract.

Deduction Methods

• The standard deduction allows business owners to lower their taxable income instead of having to tally up their actual expenses, which is also known as itemizing deductions. Formally, the standard deduction is the portion of income that is not subject to tax.

• Most low- to middle-income earners will claim the standard deduction, as it equals more than their expenses if itemized. Higher-income earners tend to have more expenses and are likelier to itemize and deduct their individual expenses. This is the method you will use to write off your lease payments. 

Leasing a Car vs. Buying: Tax Implications

There are tax implications to leasing or buying a vehicle and other matters self-employed individuals and small business owners should consider. For instance, owning a business vehicle entitles you to more substantial tax benefits, while lower costs can be associated with leasing.

Sales Tax

If you purchase and operate a vehicle for business use, you can deduct the sales tax you paid at the time of sale. This deduction may only be taken once if you purchase a vehicle. If you lease a car for business, you can deduct the sales tax that is applied to your monthly payments.

Tax Deductions

Writing off monthly lease payments is a deduction exclusively available to businesses that lease. Deductions are also available to businesses that purchase vehicles to support their operations, including: 

• Depreciation. The depreciation deduction allows you to write off a portion of your business vehicle's cost over time. You have a choice of how you'd like to take this deduction for your new car. The Modified Accelerated Cost Recovery System, or MACRS, is a calculation method that favors large deductions early on, followed by smaller deductions. The straight line calculation method allows you to take deductions evenly.  

• Vehicle loan. If you've taken out a loan to purchase your business vehicle, you can write off the interest you pay associated with the loan. If you use the vehicle partially for personal use, you can only deduct the portion you use for business. For example, if you drive your work vehicle half the time for personal use, you can deduct 50% of the car loan interest that you drove for work. 

You can take advantage of other deductions whether you lease or purchase a vehicle for business use. These deductions include:

• Mileage. You can deduct the number of business miles you've driven while operating your vehicle for business use via the mileage deduction. The standard mileage rate for 2024 is 67 cents per mile, increasing to 70 cents in 2025. While recording accurate mileage was a chore, smartphone applications, such as 1-800Accountant's mobile app, allow for easy and accurate mileage recording.

• Operating expenses. You can deduct business expenses for operating and maintaining your vehicle, including fuel, oil changes, and repairs. 

Talk to Experts About How to Write Off a Leased Car

We understand if leasing your business vehicle from a tax perspective drives you up a wall.

Leasing a vehicle can be a significant expense, which is why many small business owners and entrepreneurs trust 1-800Accountant, America's leading virtual accounting firm, for financial guidance.

Whether you need business tax preparation, tax advisory, or any of our professional accounting services, we have the affordable solutions you need to ensure your business remains compliant with a minimal tax liability. Schedule a quick consultation–usually 30 minutes or less—to learn more.