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Q&A: Can I deduct my leased vehicle? Did I lose my employee deductions?

Lionshare Partners > Blog > Q&A: Can I deduct my leased vehicle? Did I lose my employee deductions?

If you lease a car, truck, or van that you use in your business, you can use the standard mileage rate (54.5 cents per mile in 2018)or actual expenses to figure your deductible expense.If you qualify to use both methods, you may want to figure your deduction both ways to see which gives you a larger deduction. The standard mileage rate is simple and easy to calculate. Let’s say Brooke used her leased car for business use 75% of the time and drove a total of 15,000 miles in 2018. Then she would have a car business deduction of $6,131.25 (15k x 0.545 x 0.75). If you want to use the standard mileage rate for a car you own, you must choose to use it in the first year the car is available for use in your business. Then, in later years, you can choose to use either the standard mileage rate or actual expenses. If you want to use the standard mileage rate for a car you lease, you must use it for the entire lease period.In addition to using the standard mileage rate, you can deduct any business-related parking fees and tolls(Parking fees you pay to park your car at your place of work are nondeductible commuting expenses.)
If you use actual expenses to figure your deduction for a car you lease, there are rules that affect the amount of your lease payments you can deduct. Actual car expenses include: Depreciation, Licenses, Lease payments, Registration fees, Gas, Insurance, Repairs, Oil, Garage rent, Tires, Tolls&Parking fees. If you choose to use actual expenses, you can deduct the part of each lease payment that is for the use of the vehicle in your business. You can’t deduct any part of a lease payment that is for personal use of the vehicle, such as commuting. You must spread any advance payments over the entire lease period. You can’t deduct any payments you make to buy a car, truck, or van even if the payments are called lease payments.
A taxpayer that leases a business auto may deduct the part of the lease payment representing business/investment use. If business/investment use is 100%, the full lease cost is deductible. So that lessees can’t avoid the effect of the luxury auto limits, however, they must include a certain amount in income during each year of the lease to partially offset the lease deduction, if the vehicle’s fair market value (FMV) exceeds $50,000.So, if you plan on leasing a car with a fair market value of $50,000 you will need to include a certain amount in income during each year of the lease to partially offset the lease deduction.

If you use your car for both business and personal purposes, you must divide your expenses between business and personal use. You can divide your expense based on the miles driven for each purpose.You must make a choice to use the standard mileage rate by the due date (including extensions)of your return. You can’t revoke the choice.

>Ask your Employer to set up an Accountable Plan
If you are a W-2 employee and you are required to use your car for business purposing (outside of commuting to work), then you want to make sure your employer has an Accountable Plan. Accountable plans are an IRS-approved way to reimburse employees for various business expenses in a tax-advantaged manner. Everyone wins … employees are not taxed on reimbursements (the reimbursements not even reported on W-2s) and employers don’t pay employment taxes on the reimbursements.

The Tax Cuts and Jobs Act made changes that may be favorable to your business but at the same time made one big unfavorable change for employees. The Act suspended for 2018 through 2025 the miscellaneous itemized deduction for unreimbursed employee business expenses. This deduction had allowed employees who itemized their deductions to write-off their work-related costs as a deduction to the extent they exceeded 2% of adjusted gross income (AGI). Examples of employee business expenses that fell within the 2%-of-AGI rule (and could have been deductible on employees’ 2017 returns) include:
• Car or truck expenses
• Education expenses
• Home office deduction (if the office is used for the convenience of the employer)
• Subscriptions
• Tools and equipment
• Work clothes and uniforms
• Union Dues

So for 2018 through 2025, employees who pay for these business expenses out of their own pockets get no tax deduction. This limitation applies not only to rank-and-file employees but also to owners of C or S corporations who personally pay for corporate expenses because they are employees of their businesses.

There isn’t any excuse for your employer to not adopt this because there is no IRS form for this purpose. In fact, there’s technically no requirement to have the plan in writing, but you should do so. You can use a template from a CPA firm or create your own. And if you’re incorporated, it’s a good idea to reflect the adoption of the plan in your corporate minutes.

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