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J.K. Lasser's Small Business Taxes 2013: Your Complete Guide to a Better Bottom Line by Barbara Weltman

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Leasing a Car for Business

Leasing a business car is a popular alternative to buying one. If you use the car entirely for business, the cost of leasing is fully deductible. If you make advance payments, you must spread these payments over the entire lease period and deduct them accordingly. You cannot depreciate a car you lease, because depreciation applies only to property that is owned. However, you can choose to deduct the standard mileage rate in lieu of actual expenses (including lease payments).

Lease with an Option to Buy

When you have this arrangement, are you leasing or buying the car? The answer depends on:

  • The intent of the parties to the transaction.
  • If any equity results from the arrangement.
  • If any interest is paid.
  • If the fair market value of the car is less than the lease payment or option payment when the option to buy is exercised.

When the factors support a lease arrangement, the payments are deductible. If, however, the factors support a purchase agreement, the payments are not deductible.

Inclusion Amount

If the car price exceeds a certain amount and you deduct your actual costs (you do not use the standard mileage rate), you may have to include in income an inclusion amount. This is because the law seeks to equate buying with leasing. Since there is a dollar limit on the amount of depreciation that can be claimed on a luxury car that is owned, the law also requires an amount to be included in income as an offset to high lease payments on a car that is leased. ...

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