Buying vs. Leasing a Vehicle


Tax Issue


When it comes time to purchase a new vehicle, the process of haggling over price and negotiating financing overwhelms many consumers. In addition, many shopper struggle with the decision of whether they should lease a vehicle or buy it. Unfortunately, one size does not fit all. The answer depends on the specific needs and priorities of each consumer.


Applicable Tax Law

  • A taxpayer using his or her own vehicle for business purposes can ordinarily deduct expenses related that vehicle using either actual expense or a standard mileage rate.
  • When the actual expense method is used and the vehicle’s business use is more that 50%, the cost of the vehicle is depreciated under MACRS using a 5-year recovery period. The Section 179 deduction is allowed for business vehicles. The annual deduction for depreciating, including Section 179 deduction, is limited to statutory standards which are adjusted each year for inflation.
  • If a vehicle is used 50% or less for business, and the actual expense method is used, the Section 179 deduction is not allowed and the vehicles must be depreciated using the straight-line method.
  • An employee cannot deduct any interest paid on a vehicle loan even if the vehicle is used 100% for business.
  • A self-employed person may deduct part of the interest expense based on the business use of his or her vehicle.
  • Instead of deducting actual costs, a taxpayer can use a standard mileage rate to calculate the amount deductible for the business use of a vehicle. The standard mileage rate is used to replace the actual cost of depreciation, lease payments, maintenance and repairs, gasoline, oil, insurance, and vehicle registration fees. In addition to the standard mileage rate, the taxpayer may deduct expenses for interest (if self-employed, but not if an employee), personal property taxes, and parking and tolls.
  • A taxpayer leasing a vehicle may choose either the standard mileage rate or actual expenses to figure the deductible expense.
  • The standard mileage rate is allowed for a leased vehicle if it is used for the entire lease term.
  • If the taxpayer uses the actual expense method for a leased vehicle, the business percentage of each lease payment is deductible as a current deduction. Any advance payments must be spread over the entire lease period. Payments made to buy a car are not deductible, even if they are called lease payments.
  • If the lease is for a term of 30 days or more, and the taxpayer deducts actual lease payments rather than the standard mileage rate, a lease inclusion amount may be required for each year of the lease. The inclusion amount serves the same purpose as the depreciation limitation rules. The deductible amount of the lease for the year is reduced by the lease inclusion amount.


Tax Planning Strategies


Buy rather than lease. The following are advantages that buying a vehicle has over leasing one.

  • Eventually the payments cease and the consumer owns the vehicle. At the end of the loan, the consumer either has a vehicle to continue to drive payment free, or he or she has some trade-in or resale value to apply to a new vehicle.
  • There are no mileage limits to worry about.
  • Insurance requirements are typically lower than with a lease.
  • Most leases prohibit customizing vehicles with after-market accessories such as vinyl tops, exterior trim, and even trailer hitches.
  • A consumer who is hard on their vehicle may want to buy rather than lease to avoid wear and tear fees at the end of the lease.
  • A consumer expecting financial or lifestyle changes within two or three years should buy rather than lease to avoid the possible expenses of breaking the lease.


Lease rather than buy. If the following items are important to the consumer, leasing may be the better option.

  • Upfront out-of-pocket costs are generally lower than a purchase.
  • Leases generally require lower monthly payments than a financed loan.
  • A lease may be easier to obtain than a loan. A consumer may be able to acquire a larger, more luxurious vehicle than the banks are willing to finance.
  • A lease provides the consumer with the opportunity to drive a newer vehicle that is always under warranty and seldom needs more than routine maintenance.
  • The consumer will never be in a position where he or she owes more than on the car than it is worth.
  • Easy turnover. When the lease is up, the consumer just rakes the car back to the dealer and turns it in. No need to bother with selling the car or haggling with the dealer over trade-in-value.


Both purchases and leases are negotiable with the dealer based on a variety of factors.


Possible Risks


  • Initial out-of-pocket costs are typically higher than with a lease.
  • Disposing of an old vehicle can be difficult. A dealership may not give the consumer the vehicle’s full value as a trade in.
  • Interest is not deductible for employees using their own vehicle for business, but lease payments are.
  • In the first years of a vehicle payment, the majority of the payment covers interest on the loan rather than principal. Most new vehicles depreciate 20%-40% in the first few years after initial purchase. This can result in the owner owing more on the loan principal for a period of time than the car is worth.


  • The consumer will always have a vehicle payment. He or she can’t look forward to the day when the payments cease and they own the vehicle.
  • Getting out of a lease early is nearly always difficult and may include expensive termination fees.
  • Most leases charge extra for miles in excess over a certain limit. Some leases allow the consumer to purchase additional miles at a reduced rate at the beginning of the lease.
  • Any damage beyond normal wear and tear will be assessed additional fees at the end of the lease.
  • Insurance will typically only reimburse the insured for the vehicle’s market value, which might be less than what is still owed on the lease.