Maximizing Your Tax Benefits: Leasing vs. Buying a Car

Owners and entrepreneurs face many critical, high-level decisions as they build their businesses. Deciding whether to lease or buy a car might not be the most difficult decision you'll make, but it does require careful thought and consideration.

If you're unsure where to start, don't worry. The experts at 1-800Accountant, America's leading virtual accounting firm, can analyze your business to determine whether leasing or buying a vehicle is appropriate for your operations. Schedule a free call at your convenience to learn more.

In addition to speaking with our experts, this article contains the information you need to help you make this determination independently. From comparing the benefits of owning a car versus leasing one to key considerations you'll need to weigh, this guide has everything you need to make the right vehicle selection for your business. 

Tax Benefits of Leasing a Car vs. Buying a Car

Use the information about the benefits of buying a car versus a car lease from a tax perspective to help determine your small business's right course of action. 

Tax Benefits of Leasing a Car

While many tax benefits apply whether you lease or own, there is an exclusive tax advantage to using a leased vehicle for your business purposes. Before taking advantage of this benefit, you must choose the standard or actual deduction method.

The standard deduction is a way a business owner can lower their taxable income instead of having to tally up their actual expenses, also known as itemizing deductions. Formally, the standard deduction is the portion of your 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.

If you choose to lease a vehicle for your business, you can deduct monthly lease payments via the actual deduction method. The amount you can deduct depends on the percentage the vehicle is used for business activities. And unlike a typical lease scenario, you cannot deduct lease payments if you've entered a lease-to-own contract.

Tax Benefits of Buying a Car

Similar to leasing a car for your business, some tax deductions intersect, while others are exclusive to new vehicle buyers.

Deductions exclusive to businesses with a purchased vehicle include: 

• 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 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. 

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

• Mileage. You can deduct the number of miles you've driven while operating your vehicle for business use via the mileage deduction. As with other deductions, you cannot deduct mileage associated with operating the vehicle for personal use. The standard mileage rate for 2024 is 67 cents per mile. While recording accurate mileage was a chore, smartphone applications, such as 1-800Accountant's mobile app, allow for easy and accurate mileage recording. 

• Sales tax. If you purchase 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 lease a vehicle, you can deduct the sales tax that is applied to your monthly payments. 

• Operating expenses. You can deduct business expenses for operating and maintaining your vehicle, including fuel, oil changes, and repairs. These deductions are available if you use the actual expense method to calculate.

It's imperative to keep meticulously detailed records to support all your deductions for your business vehicle. These records will help calculate what you can write off and are invaluable in the event the IRS has questions about your return or sends you an audit notice. 

Leasing vs. Buying an Electric Vehicle

While the up to $7,500 tax credit for electric vehicle purchases may go away in 2025, you can still take advantage of this generous credit today. If you plan to purchase an electric vehicle, it must meet certain criteria to qualify for the tax credit. The criteria include pricing standards, battery sourcing requirements, and must be made in North America. If you intend to lease an electric vehicle, you'll have more choices while still qualifying for a $7,500 credit.

Certain states, California in particular, have additional standards for electric vehicle ownership. To qualify for the electric vehicle tax credit in California, you must plan to own the vehicle for at least 30 months. 

Key Considerations While Choosing Whether to Lease or Buy a Car

Deciding whether to lease or purchase a vehicle for your business can be difficult without weighing some key considerations.

For instance, what's the nature of your business? If you're a rideshare driver, owning outright may be advantageous as the lease contract terms will usually limit annual mileage. The contract will also require that the vehicle is well maintained and returned in good condition at the conclusion of the lease. You may be charged extra if the dealership feels there's excessive damage or wear.

If deciding whether to lease or purchase a vehicle is a close call, weigh the following considerations to help you determine which scenario is most appropriate for your operations. 

• Initial outlay

• Monthly payments

• Available options within the same monthly spending range

• Financing options

• Equity, or lack thereof

• Depreciation of value

• Ease of upgrading

• Short-term vs. long-term plans

Talk to Experts: Lower Your Tax Burden with Car Deductibles

If deciding whether to lease or purchase a business vehicle from a tax perspective is driving you up a wall, we understand. Whichever route you choose, vehicles are a big purchase for small businesses, and you want to ensure you have the best direction before finalizing your decision. That's why many small business owners and entrepreneurs trust 1-800Accountant for their financial guidance.

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