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

Leasing a Car

If you lease a car for business use, the treatment of the rental costs depends upon the term of the lease. If the term is less than 30 days, the entire cost of the rental is deductible. Thus, if you go out of town on business and rent a car for a week, your rental costs are deductible.

If the lease term exceeds 30 days, the lease payments are still deductible if you use the car entirely for business. If you use it for both business and personal purposes, you must allocate the lease payments and deduct only the business portion of the costs. However, depending on the value of the car at the time it is leased, you may be required to include an amount in gross income called an inclusion amount (explained later).

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.

Lease with an Option to Buy

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

1. Intent of the parties to the transaction.

2. Whether any equity results from the arrangement.

3. Whether any interest is paid.

4. Whether the fair market value (FMV) of the car is less than the lease payment or option payment when the option to buy is exercised.

If the factors support a finding that the arrangement is a lease, the payments are deductible. If, however, the factors support a finding that ...