How to lease a car through your business

Are you tired of putting thousands of business miles on your personal car? Or maybe you need a more professional vehicle for client meetings but don’t want to commit to a big car payment. Many entrepreneurs find that leasing a vehicle through their business offers a practical solution.

Business vehicle leasing can help you manage costs and protect your personal vehicle. You might even save money on taxes by deducting lease payments instead of taking the standard mileage deduction. If you’re growing your team, leasing can also provide reliable vehicles for your employees without a large upfront investment.

This guide will help you understand your options for business vehicle leases and avoid costly mistakes when leasing a car through your business.

How does leasing a car through your business work

If your business qualifies based on income, business credit, and other factors, it may be able to lease a car through the business. Leased vehicles may provide tax advantages, as well as help protect the owner from personal liability that arises from use of the vehicle for business purposes. 

(Of course, you’ll still want to make sure you have the right insurance for any business use of a vehicle.)

A business car lease is similar to renting a vehicle long-term. Your business (the “lessee”) makes monthly payments to use the car for a set period, usually 2-5 years. Instead of car payments on a loan, your business makes lease payments. At the end of the lease, you can return the vehicle or buy it.

The main difference from a personal lease is that your business, not you, is responsible for the lease unless you also sign a personal guarantee. This means your business makes the payments and may be able to deduct them as business expenses on your taxes.

Understand the costs of leasing

Your monthly lease payment is just one part of the total cost of leasing a business vehicle. Before you sign a lease, understand these key cost factors:

The base cost

• Capitalized cost: This is your negotiated lease price. Always try to get this below the vehicle’s MSRP (sticker price).
• Down payment: You may need to put money down, though it may be less than when buying.
• Monthly payments: These are typically lower than loan payments on a purchased vehicle.

Cost-saving opportunities

• Cap cost reductions: Look for ways to lower your lease price through:
• • Trade-in value from your current vehicle
  • Special business lease offers
  • Fleet discounts if you’re leasing multiple vehicles

Additional factors that affect cost

• Residual Value: The estimated worth of the vehicle when your lease ends. A higher residual value means lower monthly payments.
• Money Factor: This is the lease’s interest rate. To convert it to an annual rate, multiply by 2,400. For example: .00028 x 2,400 = 6.72% APR.

Don’t forget to budget for sales tax, title fees, license fees, and any local taxes that apply to your lease.

Tax considerations for leasing a car for business

Nav does not provide legal or tax advice. Consult your own tax and legal advisors for advice specific to your situation.

If you are self-employed, you can’t just get a lease in the name of your business and automatically deduct your vehicle expenses from your state or federal income taxes. Both the IRS and state taxing authorities have strict rules about deducting vehicle expenses. 

Generally, if you use a vehicle strictly for business purposes, you may deduct the cost of ownership and operation (though there are some restrictions). If you use it for both business and personal purposes, you may deduct only the cost of the business use and you must track that carefully.

Though note that even if you use a vehicle exclusively for business, there may be limits on certain deductions (such as the “inclusion amount” for leased vehicles and caps on depreciation for purchased vehicles)

The IRS generally offers two ways to figure business use: the standard mileage rate method or the actual expense method. The IRS standard mileage rate for business mileage is 67 cents per mile in 2024. You choose one method and use it for the entire tax year— you can’t switch back and forth mid-year. 

With the actual expense method, you must track the actual vehicle expenses attributable to the use of the vehicle in your business. You can then take a deduction for the cost of car expenses such as fuel, oil, repairs, tires, insurance, registration fees, licenses, and depreciation—and in this case lease payments— attributable to the portion of the total miles driven that are business miles.

The IRS spells out some unique tax considerations associated with business car leasing. 

If you choose to use the actual expense method, you can deduct the part of each lease payment that is for business use of the vehicle. But you can’t deduct the lease payment associated with personal use of the vehicle (such as commuting).

You must spread any advance payments over the entire lease period. And you can’t deduct any payments you make to buy a car, truck, or van even if the payments are called “lease payments.”

Finally, if you lease a car, truck, or van for 30 days or more, you may have to reduce your lease payment deduction by an “inclusion amount,” which reduces the deduction for your lease payment. (The IRS explains that this is similar to a depreciation deduction if you purchased a vehicle.) This amount applies only to leased vehicles above a certain fair market value threshold, which the IRS updates annually. You can find details in IRS Publication 463. 

Since the tax implications of leasing versus buying can be confusing, it’s wise to talk to your tax professional to decide what’s best for your business. 

Keep in mind that you don’t have to lease a company car through their business to get tax benefits. Following the IRS guidelines for claiming vehicle business expenses, business owners just as easily lease a car personally and then write off qualified business costs through the standard or actual expense method.

Tracking business use and business purpose is essential! 

Types of vehicle leases

When leasing a vehicle for business, there are two main types to consider: open and closed leases. Understanding the differences can help you choose the option that best supports your business needs and budget.

Open lease 

An open lease is often preferred by businesses that expect to put substantial mileage on their vehicles. With an open lease:

• You pay the difference between the car’s estimated residual value (set at the beginning of the lease) and its actual market value at lease end.
• Higher mileage allowances are usually included, making it a practical choice for businesses with heavy travel demands.
• While you’re responsible for any excessive wear and tear, open leases typically provide flexibility to accommodate higher use.

This type of lease may be more cost-effective if your business requires extensive driving, as it avoids the high fees that can come with exceeding mileage limits in closed leases.

Closed lease 

A closed lease works more like a personal lease, offering predictable costs as long as you stay within the agreed terms. With a closed lease:

• You pay for any miles driven over your pre-set limit, as well as for any damage beyond standard wear and tear.
• If you stay within these limits, you can return the vehicle at the end of the lease without worrying about its market value.

Closed leases can be a good fit for businesses with more predictable, limited driving needs, where exceeding mileage limits is unlikely.

Which one is best for your business? It depends, though many business owners find open leases a better fit due to the flexibility in mileage and the potential cost savings on overage fees. However, if your business driving is predictable and limited, a closed lease may offer the stability and peace of mind you prefer.

The IRS spells out some unique tax considerations for business car leasing. 

If you choose to use the actual expense method, you can deduct the part of each lease payment that is for business use of the vehicle. But you can’t deduct the lease payment associated with personal use of the vehicle (such as commuting).

You must spread any advance payments over the entire lease period. And you can’t deduct any payments you make to buy a car, truck, or van even if the payments are called “lease payments.”

Finally, if you lease a car, truck, or van for 30 days or more, you may have to reduce your lease payment deduction by an “inclusion amount,” which reduces the deduction for your lease payment. (The IRS explains that this is similar to a depreciation deduction if you purchased a vehicle.) You can find details in IRS Publication 463. 

Since the tax implications of leasing versus buying can be confusing, it’s wise to talk to your tax professional to decide what’s best for your business. 

Keep in mind that you don’t have to lease a company car through their business to get tax benefits. Following the IRS guidelines for claiming vehicle business expenses, business owners just as easily lease a car personally and then write off qualified business costs through the standard or actual expense method. 

Understand leasing vs buying a car for business

Here are a few key differences between buying and leasing to consider:

Source: Nav

What are the top questions to ask when leasing a car for business?

Here are some important questions to ask if you are considering leasing:

Costs and payments

• What are the costs? Are there upfront fees or down payment? If so, how much? How much are the payments and what are the payment terms?
• Are there any incentives or discounts available for business leases? Some dealerships offer special programs or discounts for business leases. 

Vehicle use and restrictions

• Is there an option to buy the vehicle at the end of the lease? Knowing if a buyout option exists (and how it works) can be helpful, especially if you decide to keep the vehicle.
• How are mileage limits calculated (monthly, yearly, or over the entire lease period)? This helps clarify if mileage restrictions are flexible over the lease duration or calculated more frequently.
• What other restrictions apply? Can I incur charges for excess wear and tear?

Maintenance and care

• What’s the process for handling warranty-covered repairs? What kind of warranty is there? And what happens if there is a recall? Ask about the dealership’s or manufacturer’s role in major repairs.

Legal and business considerations

• Will the lease affect my business credit or personal credit? Credit is one of the reasons some business owners choose to lease through their business. Will the lease report to business credit? If so, on-time payments can help establish business credit. And will it report to personal credit? If so, how will that impact your personal credit?
• How are lease payments structured for tax purposes (e.g., are they deductible as operating expenses)? Ensures they understand the potential tax benefits or requirements for tracking lease payments.

Qualifying for a business lease

Business vehicle leases typically come from three main sources: the finance departments of vehicle manufacturers, leasing companies that partner with multiple dealerships, and, less commonly, certain banks. If you drive for ride-sharing services like Uber or Lyft, it’s a good idea to check for leasing programs tailored specifically for drivers.

Guarantor/personal guarantee: Especially for newer businesses, a personal guarantee by the business owner or a guarantor may be required to secure the lease.

Creditworthiness: Strong business credit scores are crucial since they reflect your business’s ability to manage debt and make timely payments. If your business is newer or lacks a credit history, the personal credit of the owner(s) might be considered.

Financial documentation: Leasing companies often require proof of business income in the form of business checking account statements.

Business proof: Documents proving the existence and legal entity of the business, like a business license, articles of incorporation, or tax ID number, are usually needed.

Insurance: Businesses must secure and provide proof of comprehensive and collision auto insurance that meets the lessor’s minimum requirements.

For newer businesses, a personal guarantee is often required. This means you’ll be personally responsible if your business is unable to make payments. You’ll likely also need to provide both business and personal financial records and meet higher credit standards.

How to report a car lease on LLC taxes

Reporting a car lease on an LLC’s taxes involves recognizing the lease payments as business expenses. Here’s a simplified guide on how to do it:

1. Determine business use percentage: First, you need to calculate the use of the leased vehicle for business purposes versus personal use. Only the portion of the lease payment that corresponds to business use can be deducted.
2. Lease payments as deductions: Include the portion of the lease payments that corresponds to business use as a deduction on your LLC’s tax return. For instance, if the car is used 75% for business and 25% for personal use, you may be able to deduct 75% of the lease payments.
3. Additional expenses: Beyond the lease payment, you can also deduct other vehicle-related expenses that are proportionate to the business use of the vehicle. This includes gas, maintenance, insurance, and registration fees, among others. Each of these expenses should be prorated based on the percentage of business use.
4. Use the appropriate tax forms: For a single-member LLC, you would typically report this on Schedule C (Form 1040) as part of your personal tax return, as single-member LLCs are considered disregarded entities for tax purposes. For multi-member LLCs, treated as partnerships, you would report this on Form 1065, and then the deductions flow through to the individual members’ Schedule K-1.
5. Keep detailed records: It’s crucial to maintain meticulous records of both the lease payments and the vehicle’s business use (including a mileage log) to substantiate your deductions in case of an IRS audit.

Alternative options to leasing a car for business

If leasing isn’t right for your business, you may want to consider other options.

The most obvious is to find out whether you can buy the vehicle, either outright or with financing. Again, if you drive the vehicle for business use, you may still be able to take advantage of tax deductions for business use, even if the car loan is in your personal name. 

Your business could also consider other types of small business loans to purchase a vehicle, such as a line of credit, term loan, or even a business credit card if you have a large enough credit limit. This can be helpful if you’re trying to buy a very specialized or older vehicle that’s difficult to get financing for. 

Is a car lease the right decision for your small business?

A business vehicle lease works differently from buying a used or new vehicle. You’ll make monthly payments for a set lease term, usually over 2-5 years, and then return the vehicle or buy it at lease end. Monthly payments are typically lower than loan payments, and you’ll need less money upfront for a down payment. Many leases also include routine maintenance, which helps control your costs.

Consider leasing if you want to project a professional image with newer vehicles but don’t want to commit to long-term ownership. It’s especially attractive if your business needs reliable transportation but lacks the cash for a large down payment. You can often lease a newer model for the same monthly payment as buying an older one.

However, buying might make more sense if you plan to keep your vehicle for 10 years or longer. Over time, you’ll benefit from lower insurance costs and eventually eliminate car payments altogether. Ownership also gives you the freedom to modify the vehicle for your business needs or sell it whenever you want.

Think about your long-term plans. If you’re comfortable returning your vehicle every few years and starting fresh, a lease provides flexibility with predictable costs. But if you prefer building equity and minimizing long-term expenses, purchasing your business vehicle might be the better choice.

Frequently asked questions about leasing a car for business

Can you lease a used car?

Yes it may be possible to lease a used car, but you will have to find the right vehicle and a leasing company willing to finance it. Your selection will be much more limited than for a new car. 

Can you wrap a leased car?

You may be able to wrap a leased car but you’ll want to check your lease agreement, and make sure the company that wraps your vehicle uses high quality materials that can be easily and completely removed. 

What happens at the end of a car lease?

At the end of the lease you typically have the option of buying the vehicle or returning it. In some cases you can extend a lease. If the residual value is lower than the market value, and you still want the vehicle, it may make sense to buy it. (It may be cheaper than trying to find another vehicle.) 

Depending on the terms of your lease, you may have to pay for excess mileage and/or wear and tear.