The following answer is with an eye towards pre-2018 laws and could change based on whether or not you are going to itemize for 2018. Also for 2018, AMT rates will be lowered so this might also affect your decision. I suspect there will be some online tax buy vs. lease calculators adjusting for the new law appearing shortly. Either way, typically leasing has always been best as far as tax deductions go.
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Some expenses differ between purchased and leased vehicles using the actual expense rules, and because you don’t own a leased vehicle, you can’t depreciate it. However, you can deduct the business percentage of your lease payments. So if your yearly lease payment is $4,200 ($350/month) and your business use percentage is 80%, you may be able to deduct $3,360 on your tax return for that year.
There is one hitch: since the tax code limits the depreciation on “luxury” cars, it also limits (to a very small degree) lease payments on such a car. It’s called a “lease inclusion amount” and it reduces the deductible lease payments. The higher the original value of the car, the greater the amount. This income inclusion rule is an attempt to equalize the tax benefits from leasing and owning business vehicles.
For example, a vehicle leased in 2017 that is valued at $45,500 and that is used 100% for business would require an income inclusion amount of $54 to be subtracted from the 2017 lease payments in arriving at the deductible amount for that year. In 2018, the income inclusion amount would be $119. Higher income inclusion amounts would apply for 2019 through 2021.
As the price goes up on the car, leasing usually becomes more preferable. But don’t forget if you purchased the vehicle, you can also deduct the interest on the vehicle’s loan based on the percentage of business use. If you purchased a car this year to transport passengers for self-employment jobs like Uber and Lyft and you bought a sports utility vehicle, you may be able to deduct up to $25,000 of the cost of the vehicle if you use it more than 50% for your business. If you purchased a car for your business you may also be able to deduct up to the depreciation deduction allowed if your business use is more than 50%.
