When a taxpayer leases a vehicle and uses it in a trade or business, the taxpayer may deduct the lease expense based on the proportion that it is used for business. For example, if a business owner uses her leased vehicle 80% for business, then she may deduct 80% of the lease payments as a business expense. Instead of deducting the lease payments and other operating expenses of the lease vehicle, taxpayers also have the option of using the standard mileage rate (57.5 cents per mile in 2015) for business miles.
The IRS is concerned about taxpayers buying luxury vehicles and taking business deductions for them. To combat this abuse, the IRS placed limits on how much a taxpayer can depreciate a luxury vehicle per year. The IRS got pretty stingy when it defined a luxury auto—any vehicle over roughly $16,000 is considered to be a luxury auto. Likewise, when a taxpayer leases a luxury vehicle, he will have to reduce the lease expense by a lease inclusion amount that is based on the fair market value of the vehicle. The lease inclusion amount applies to vehicles that are leased for more than 30 days. Taxpayers who use the standard mileage rate to deduct leased auto expenses do not have to reduce their auto expenses by the lease inclusion amount.
To determine the lease inclusion amount, the fair market value of the vehicle must be determined. The fair market value is equal to the capitalized cost of the auto if that figure is specified in the lease agreement. If the capitalized cost is not specified in the lease agreement, the taxpayer may refer to a publication such as Kelley Blue Book to determine the fair market value of the auto.
Example: John begins a lease on a Buick Regal during 2015. John uses the vehicle 100% for business. His lease payment is $300 per month and the capitalized cost in the lease agreement is $30,000. John’s lease expense for 2012 is $3,300. The lease inclusion amount for 2015 based on a $30,000 fair market vehicle is $9. Therefore, John lease expense for 2015 is $3,291 ($3,300 lease payment less $9 lease inclusion amount).
Example 2: Same as above, except that John uses the vehicle 80% for business. John’s lease expense is now $2,640 ($3,300 lease payment times 80% business use). His lease inclusion amount is $7.20 ($9 times 80% business use). His lease expense for 2015 is therefore $2,632.80.
As you can see, the lease inclusion amount isn’t too big of a deal. But it’s still something that has to be tracked.
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Buzzkill Disclaimer: This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.