Can You Write off a Leased Car?

Claiming eligible tax deductions lowers your business's total taxable income and overall tax liability. Self-employed individuals, freelancers, and small business owners who lease a vehicle can deduct part of the cost, using either the standard mileage rate or the actual expense method.

Use this blog to learn the ins and outs of claiming tax deductions for leased vehicles and other critical information to ensure a minimal tax burden and ongoing IRS compliance.

Can You Write Off a Leased Car?

Yes, there are write-offs that self-employed individuals and entrepreneurs who lease a vehicle for business use can claim. Typically, qualifications set by the IRS must be met to claim a write-off. It's a best practice to retain paperwork and other documentation that supports the write-offs you'll claim, such as a contemporaneous 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, like picking up supplies and running errands.

Taxes, Tax Write-Offs, Methods, 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 both personally and professionally, you can write off expenses based on the percentage of 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.

If you drive 12,000 miles total in 2026, with 4,000 business miles in the first half and 4,000 in the second, you'll find that both methods produce similar results.

If you use the standard mileage rate, multiply 4,000 miles by $0.725 (first half) and $0.760 (second half) for a $5,940 deduction. For the actual expense method, your business use is nearly 67% in this scenario, with total expenses of $10,000, resulting in a deduction of $6,670.

Business Use Percentage and the Lease Inclusion Amount

It's not uncommon for business owners to use vehicles for both business and personal use. Personal expenses aren't deductible, but the business use percentage is. The business use share of a lease payment, fuel, insurance, and maintenance is deductible when a vehicle serves dual purposes.

The IRS Lease Inclusion Amount

The IRS lease inclusion amount is extra income a business must report when leasing a high-value or "luxury" vehicle for business use. It is designed to balance tax benefits so that leasing an expensive car does not offer a bigger write-off than buying one under standard depreciation limits.

Beginning in 2026, higher-value or "luxury" vehicles are subject to an inclusion amount under Revenue Procedure 2026-15, which slightly reduces the deductible lease payment each year. You can sidestep this rule by using the standard mileage rate.

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 of the vehicle's use for business activities. You are unable to deduct lease payments if you've entered into a lease-to-own contract.

A lease-to-own or dollar-buyout contract is treated as a financed purchase rather than a true lease because ownership of the vehicle automatically transfers to the lessee for a nominal fee at the end of the term.

Leasing an Electric Vehicle in 2026

The One Big Beautiful Bill Act ended the federal EV $7,500 tax credit, including the credit tied to leased EVs, for vehicles acquired after September 30, 2025. There's a remaining narrow manufacturer exception sunsetting entirely on January 1, 2027.

While a separate One Big Beautiful Bill Act provision allows an above-the-line deduction of up to $10,000 per year on new vehicle loan interest, it applies exclusively to purchases, not leases.

Some state and local EV incentives may still apply, but vary by location. Check with state authorities or a tax professional to confirm they are still active.

Recordkeeping Requirements for Leased Vehicle Deductions

Recordkeeping is important for claiming eligible deductions because the legal burden of proof rests on businesses and self-employed individuals. If the IRS questions a deduction, you must provide evidence, like a receipt, to substantiate the expense. Without proof, even legitimate deductions may be disallowed, resulting in penalties and interest.

It's important to understand mileage log requirements. For each business trip, you must record the date, business purpose, and miles driven at or around the time of the trip. The IRS expects contemporaneous logs. Hastily reconstructing them just before tax time isn't allowed. You must also retain the lease agreement for the full term, and at least three years after. And if you'll use the actual expense method, make sure receipts are kept in a secure, centralized location. This will make tax preparation more efficient.

Mileage-tracking applications, including 1-800Accountant's mobile app for iOS and Android, simplify this recordkeeping task.

Leasing a Car vs. Buying: Tax Implications

There are tax implications to leasing or buying a vehicle, as well as 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 are 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 be taken only once when 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. Business tax deductions are also available to operations that purchase vehicles for their business use, 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 depreciation method that favors large deductions early, followed by smaller ones. 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 deduct only the portion used 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 2026 is 72.5 cents for the first half of the year, and 76 cents for the second half. While recording accurate mileage was a chore, smartphone applications such as 1-800Accountant's mobile app make it easy and accurate.

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

FAQs About Writing Off a Leased Car

Can I deduct my full lease payment if I also use the car personally?

No, you cannot deduct your full lease payment if you also use the car for personal reasons. You must split your mileage between business and personal. You can only deduct the part of the cost that matches your business use, as personal expenses aren't typically deductible.

Can I switch from the standard mileage rate to actual expenses partway through a lease?

No, you cannot switch methods during the lease term if you use the standard mileage rate in the first year. If you use the standard rate in the first year of the lease, you must stick with it for the entire lease. You can only use the actual expense method if you pick it from the very start.

What happens if I exceed the mileage limit on a leased business vehicle?

Extra miles may incur an additional fee when you return the car. You can deduct this extra-mile fee as a business cost if it is for your work. The fee would count as a normal business expense for that year.

Can an LLC or S corp write off a leased vehicle the same way a sole proprietor can?

Yes, business entities, including LLCs and S corps, write off leased cars in a very similar way. The business must still track business versus personal use, unless the vehicle is used exclusively for business. The rules for deductions and limits apply to a company just like they do for a single owner.

Do I need special documentation to claim a leased vehicle deduction?

Yes, you need a detailed mileage log to prove your business use. The log must be contemporaneous and show the date, miles driven, and business purpose for each trip. You also need to retain all your lease papers and receipts for gas and repairs.

Efficiently Write Off Your Work Vehicle

Determining whether you can write off your leased vehicle is simple: you can. The devil is in the details, and if you get the rules wrong or go by outdated information, you'll almost certainly end up with a bigger tax bill. Expert support ensures a smooth ride and that every deduction is claimed.

If you're ready for a new level of recordkeeping that ensures accuracy and year-round support, explore 1-800Accountant's full-service bookkeeping solution for your small business today.