Are There Tax Benefits of Leasing a Car vs. Buying a Car?

When deciding whether to lease or buy a car, you should look beyond monthly payments and interest rates to make a decision. One major factor that often gets overlooked is how each option impacts your taxes. Depending on your situation, leasing a car versus buying one could offer distinct tax advantages, particularly for those who use their vehicle for business purposes. In other cases, buying may be the wiser strategy. Accurate record-keeping and understanding IRS rules are central to maximizing tax benefits. ​A financial advisor can also help you determine whether leasing or buying a car is more tax-efficient for your finances.

Tax Impact of Using a Car for Business Purposes

​Tax benefits primarily apply to vehicles used for business purposes, though personal use could also offer limited tax advantages. ​

Self-employed individuals or business owners may deduct certain expenses, such as mileage or actual costs, when the vehicle is used for business-related travel. However, commuting from home to a primary workplace is generally not deductible.

You will need to keep clear documentation and comply with IRS rules to maximize these benefits.

Tax Benefits of Owning a Car

One of the main tax benefits of owning a car can be the ability to deduct depreciation. The IRS allows business owners and self-employed individuals to write off a portion of their car’s value over time through depreciation deductions.

Deductions based on depreciation can reduce taxable income, though the exact amount depends on the vehicle’s classification and how much it is used for work-related activities. The Section 179 deduction and bonus depreciation provisions can further enhance savings for those who qualify.

If you finance a car for business use, the interest paid on your auto loan may be deductible as a business expense. This is a key advantage of ownership that is not available when leasing.

However, to qualify for this deduction, the vehicle must be used for business purposes. Personal-use vehicles do not qualify. You may be required to document any claims for business use deductions, so it’s important to maintain accurate records distinguishing business mileage from personal trips.

Rather than claiming depreciation and loan interest, some car owners choose to deduct vehicle expenses using the standard mileage rate set by the IRS. This method allows business owners and self-employed individuals to claim a per-mile deduction for qualifying business travel, which can be particularly beneficial for those who frequently drive for work. For 2025, the IRS has set the standard mileage deduction at 70 cents per mile for business use.

In some cases, car owners may be able to deduct state and local taxes associated with their vehicle. The IRS allows taxpayers to choose between deducting state income tax or sales tax, which includes any sales tax paid when purchasing a vehicle.

Additionally, property taxes on a car may be deductible if they are assessed based on the car’s value rather than a flat fee. Checking state and local tax regulations can help determine whether these deductions apply.

Tax Benefits of Leasing a Car

One key tax benefit of leasing a car is to deduct lease payments when the vehicle is used for business purposes. The IRS allows business owners and self-employed individuals to write off a portion of their lease expenses, which can provide significant tax savings. The deduction is typically based on the percentage of time the car is used for business, so maintaining accurate mileage records is essential for compliance.

Unlike purchasing a vehicle, leasing eliminates depreciation as a potential write-off. When you own a car, depreciation can be deducted for business use, but often comes with complex calculations and limits. With a lease, there’s no need to track depreciation deductions separately, as the tax benefits are built into the deductible lease payments. This can simplify tax filing and reduce the administrative burden for business owners.

For those who lease a vehicle for business use, there is also the option to claim the standard mileage deduction instead of deducting actual lease payments. Using the standard mileage rate can sometimes result in greater tax savings than deducting lease expenses. This method can be particularly beneficial for those who drive extensively for business but should be evaluated based on individual circumstances.

Lastly, you should note that while leasing can offer you deductible payments and lower upfront costs, it does not build equity like purchasing a vehicle. Evaluating your business needs and consulting with a tax professional can help determine whether leasing or buying provides the greatest financial advantage.

How to Decide Whether You Want to Buy or Lease a Car

When deciding whether to buy or lease a car, the first step is to assess your financial situation. Buying a car requires a larger upfront cost and long-term commitment, but it allows you to build equity in an asset. Leasing, on the other hand, typically comes with lower monthly payments and little or no down payment, making it a more budget-friendly option in the short term.

Your typical driving patterns play an important role as well. For example, lease agreements often come with mileage limits, and exceeding them can result in costly fees. If you drive frequently or take long road trips, buying a car may be the better option, as it allows unlimited mileage. However, if you primarily use your vehicle for commuting within a set distance, leasing could offer lower payments.

For business owners or self-employed individuals, tax benefits can influence the decision to buy or lease a car. Lease payments may be deductible if the vehicle is used for business, providing potential tax advantages. On the other hand, purchasing a car allows for deductions related to depreciation and loan interest. Consulting a tax professional can help determine which option offers the most financial benefits based on your specific circumstances.

Bottom Line

Deciding whether to lease or buy a car involves more than just monthly payments—it also has important tax implications. Leasing can offer appealing tax advantages for those using their vehicle for business, as lease payments may be deductible. Meanwhile, buying a car allows owners to deduct depreciation and, in some cases, loan interest from their income, making it a more beneficial long-term option for certain taxpayers. Neither choice is always best for all drivers. The optimum selection depends on your financial goals, vehicle usage and tax situation.

Tax Planning Tips

• If you are looking for ways to lower your tax liability, a financial advisor who specializes in tax planning has the expertise to help. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
• f you want to know how much your next tax refund or balance could be, SmartAsset’s tax return calculator can help you get an estimate.

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