Leasing a car under a business may allow you to deduct costs as part of the business expense. In the light of this, you will learn here how to write off a car lease with an LLC (Limited Liability Company).
To write off a car lease with an LLC, figure out the mileage you will cover, estimate the IRS standard mileage deduction, add up vehicle-associated costs during the lease and apply a car lease write-off method. Report and deduct car lease sales tax on Schedule C (Form 1040).
An LLC does not necessarily change how you deduct expenses on a car lease. Nonetheless, it can protect you when your business faces a liability.
Of course, you can easily write off a car lease with your correct paperwork showing the amount of money spent and your use of the car for the business.
What is a car lease write off?
To write off a car means to deduct the actual cost of your leased car. It involves expenses such as gas, tune-ups, lease payment, tires, etc. You want to keep a record of these receipts.
A leased car in your LLC is a deductible expense in the business. You will typically get a deduction for going on a road trip to find out new retail prices or driving to deliver supplies to clients.
When you deduct a portion of your car lease, it reduces the taxable income of your LLC. The lease deduction is just part of your small business tax deductions that typically bring down the tax bill.
Car Lease Write Off Methods
Before you write off a car lease, you need a method that gives you the highest deduction. We have the standard mileage and actual cost methods.
You cannot change the method of your car lease deduction, so you bring in the leased car expenses and mileage. The car lease write-off method you select at the start of the lease is what you use until you return the car.
You can predict how the leased car will be used for the LLC and the potential costs to be incurred. However, the idea will be unclear. For this vagueness, your estimating can be wrong, so keep this in mind when applying the methods.
Below are the car lease write off methods to consider:
- Standard mileage rate
The standard mileage rate is easier to follow, typically preferred by taxpayers.
IRS mileage rate is not stable, it changes each year, so you cannot use the rates for the previous to calculate for the next.
- Actual cost
In this car lease write-off method, you deduct the actual costs of the car you leased. The expenses will include tires, gas, tune-ups, insurance fee, etc.
You cannot deduct all the cost of the leased car if you use it for personal trips. Look for the total miles percentage of the leased car used during the business, not including commuting.
For instance, let us assume that the leased car costs $7,500 annually, including car payment, insurance, and gas. If you have 10,000 miles on the car, and one-quarter goes for commuting to work and personal trips, your actual cost becomes three-quarters of the actual costs.
How to Write Off a Car Lease with an LLC
In this section, we will see how you can write off a car under your business. Below are the steps regarding how to write off a car lease with an LLC:
Figure out the mileage you will cover
You want to figure out the miles your car will cover for both business and personal use.
Note that your daily commute is not deductible as business mileage, so you can only write off the cost of using the car for the business.
Know your business trips, like the visits you make to clients, driving to find out new retail prices, and more. You just want to have a record of the miles you cover during the course of running the LLC during the lease. Tracking your miles allows you to easily estimate your mileage per year.
Figure out the IRS standard mileage deduction
You can estimate your deduction using the standard IRS mileage deduction. However, the IRS’ mileage rate changes yearly, so it is not possible to tell the future rates, your predictions could be wrong.
In this case, you can use the standard IRS mileage rate for the present year to measure your annual IRS mileage deduction. Use the estimated miles you covered on the course of your business to multiply with the rate of the present year’s IRS mileage for an estimated deduction.
Add up vehicle-associated costs during the lease
Add up the costs you incurred on the leased car in the business. These costs include oil, gas, insurance costs, repairs, tune-ups, and more. Expenses such as impound fees, parking tickets, and tolls should be recorded as separate deductibles. You could also add the cost of the personal use of the car in your calculation.
Apply a car lease write off method
Your next step is to apply a car lease method that gives you the highest deduction.
If both methods give you the same outcome, it does not mean you are lucky with the best method. In this case, you should go with the standard mileage rate method which is easier than the actual cost method that is harder to implement.
If you find it difficult to tell what method works the best for you, contact a tax professional to help you lower the business tax liability.
How much can you write off on a car lease through LLC?
Some LLC owners use personal cars as part of the business. However, you only deduct the costs proportionate to the miles covered for the business. You cannot write off personal or work commuting, for example, on your business taxes because they do not qualify as business travel.
Again, the method (standard mileage rate or actual cost) you used initially for writing off leased car expenses cannot be changed until the end of the lease. Ensure to make a good decision, you can have a tax professional help you out.
Car depreciation does not apply to your leased car but does for a personal car. Nonetheless, certain leased cars are qualified for a section 179 vehicle deduction which may allow you to take a first-year deduction that is more than the costs of your actual lease for the year.
Unfortunately, taking a first-year deduction more than the cost of the actual lease means waiving your ability to write off more leased car expenses until the end of the lease.
Can you deduct sales tax on a car lease?
When using the actual cost method to write off a car lease, you can deduct your monthly sales tax. This comes on a separate line on the business tax return. However, you can skip this if you use the standard mileage rate deduction.
A single-member LLC or a sole proprietor will report and deduct sales tax on car lease on Schedule C form. Add the leased car repair, insurance, and gas costs on line 9. Line 20a can contain your lease payments while line 23 contains the lease sales tax.
Meanwhile, I have covered the steps you can follow to transfer your personal vehicle to an LLC.