Car leasing is still less popular than buying, with just over 25% of new vehicles rented by American consumers, yet there are many notable incentives to leasing. Learn about the tax benefits of leasing a car:
Tax Benefits of Leasing a Car
1. Tax breaks for individuals
In most states, an individual pays sales tax only on the monthly payments, not the vehicle price. Therefore, when you lease a car, you will never pay taxes on the full cost of the car (like $23,365 for a 2013 Nissan Altima) but will instead pay taxes only on the monthly cost (like $179 on the same Altima). Important to note: Arkansas, Illinois, Maryland, Oklahoma, Texas, and Virginia charge sales tax on the vehicle’s entire price.
2. Buying vs. leasing for 36 months
Imagine that you negotiate to buy a 2013 Nissan Altima for the invoice price of $21,403 (as opposed to the MSRP of $23,365) with 10% down and a five-year loan at 2.9% APR. After three years, you decide that a new car is appealing. If you trade in the Altima, according to Kelley Blue Book, then you will likely get around 46% of the MSRP (or $10,621). Keep in mind, though, that you will still have to pay off the loan. Thus, your total cost of owning the Altima for three years will have been $9,525.
But if you lease the Altima for three years, your down payment will equal $1,820 with $179 in monthly payments. When you turn in the car, you will have no loose ends or loans to pay. The total cost to you will have been $8,264.
By leasing, you will have saved $1,261 by not buying.
3. Tax breaks if you use the leased car for business purposes
Lease payments can be deducted if you use the car for business. If you use the car 100% for business, then the entire monthly payment is deductible. If you drive the same car for personal use, however, you must adjust the deduction. To do so, add up your total business miles. Divide that number by the total miles. For example, if you drove 3,000 miles for business and 20,000 miles total, then your deductible expenses would equal 15%.