You cannot depreciate a leased vehicle for business, because depreciation is only available to the legal owner of the property. The leasing company holds title, so it claims the depreciation. What you can do instead is deduct your lease payments as a business expense, adjusted for your business-use percentage and, on vehicles worth more than $62,000, reduced by an IRS figure called the lease inclusion amount.
Why Depreciation Isn’t Available to a Lessee
Federal tax law allows depreciation on property used in a trade or business or held to produce income, and the deduction is built on the property’s adjusted basis — essentially what the owner paid for it.1Office of the Law Revision Counsel. 26 U.S. Code 167 – Depreciation A lessee has no ownership interest and no cost basis, so there is nothing to depreciate. The lessor holds title and takes the deduction on its own return.
The same logic rules out the two big write-off tools that owners use. A purchased vehicle can be recovered over five years under the Modified Accelerated Cost Recovery System and may qualify for Section 179 immediate expensing or bonus depreciation.2Office of the Law Revision Counsel. 26 U.S. Code 168 – Accelerated Cost Recovery System Section 179 applies only to property acquired by purchase, so a lessee gets none of it.
Deducting the Lease Payments
Instead of depreciation, you deduct the lease payments as rent. The tax code specifically allows a deduction for rental payments required for the continued use of business property to which you have not taken title.3Office of the Law Revision Counsel. 26 U.S.C. 162 – Trade or Business Expenses A sole proprietor reports it on Schedule C. Corporations report it on Form 1120 or Form 1120-S.
You can only deduct the business-use portion of what you pay. If you drove 12,000 business miles and 4,000 personal miles, your business use is 75%, and you deduct 75% of the year’s lease payments. That percentage has to come from an actual mileage log, not an estimate. For a more expensive vehicle, a second adjustment sits on top of this one.
The Lease Inclusion Amount
The lease inclusion amount keeps leasing from becoming a workaround for the depreciation caps that apply to purchased vehicles. If you bought a passenger automobile in 2026 and claimed bonus depreciation, the most you could write off in the first year is $20,300.4Internal Revenue Service. Revenue Procedure 2026-15 Without the inclusion rule, someone leasing a $100,000 vehicle could deduct far more than that through lease payments alone.
Two conditions trigger the rule: the vehicle’s fair market value at the start of the lease exceeds $62,000, and you are using the actual expense method.5Internal Revenue Service. Publication 463 – Travel, Gift, and Car Expenses If you use the standard mileage rate, the inclusion amount does not apply.
Despite the name, you don’t add anything to income. You reduce your lease payment deduction by a dollar figure the IRS publishes in annual tables. The taxable result is the same as an income inclusion, but the mechanic is a smaller deduction.
Running the Calculation
The IRS publishes a table each year in its annual revenue procedure. For leases beginning in 2026, the table is in Revenue Procedure 2026-15. The steps:
- Find the row for your vehicle’s fair market value at lease inception and read across to the column for the current year of the lease.
- Prorate that dollar amount for the number of days the lease was active during the tax year. A full-year lease needs no proration.
- Multiply the prorated amount by your business-use percentage. The result is what you subtract from your lease payment deduction.
A 2026 Example
Say you lease a vehicle with an FMV of $88,000 and use it 80% for business. The 2026 table shows a first-year inclusion dollar amount of $139 for vehicles valued between $85,000 and $90,000.4Internal Revenue Service. Revenue Procedure 2026-15 On a full-year lease, you multiply $139 by 80%, which equals $111.20. That $111.20 comes off your total lease payment deduction for the year.
In this price range, the reduction is modest. The numbers climb quickly for pricier vehicles — a $200,000 vehicle triggers a first-year figure of $766, and later lease years show larger amounts as well. Most people leasing in the $65,000 to $80,000 range see a first-year reduction under $100. Small, but not optional. Missing the adjustment can be corrected on audit with penalties added.
Actual Expenses or Standard Mileage
You can calculate a vehicle deduction two ways: the actual expense method or the standard mileage rate.6Internal Revenue Service. Topic No. 510, Business Use of Car The choice matters more for a leased vehicle because of a permanent lock-in.
Actual expenses means totaling everything you spend to operate the vehicle — fuel, insurance, repairs, registration, and lease payments — then applying your business-use percentage. On a vehicle with an FMV above $62,000, you also subtract the lease inclusion amount. You need receipts and records for every category.
The standard mileage rate replaces all of that with a per-mile figure. The 2026 rate is 72.5 cents per business mile, and it covers lease costs, fuel, maintenance, and insurance together.7Internal Revenue Service. 2026 Standard Mileage Rates Under this method you cannot separately deduct lease payments, gas, or repairs.
The Lock-In Rule
If you pick the standard mileage rate in the first year on a leased vehicle, you must use it for the entire lease term, including renewals.6Internal Revenue Service. Topic No. 510, Business Use of Car No switching to actual expenses partway through. The reverse also holds: start with actual expenses on a lease, and you’re stuck there for the lease’s duration.
Which method pays better depends on how you drive. Heavy business mileage often favors the standard rate — 72.5 cents on 25,000 business miles produces an $18,125 deduction with no receipts to sort. An expensive lease driven few business miles often favors actual expenses even after the inclusion reduction. Run both calculations before you file the first return covering the vehicle, because that first return sets the method for the rest of the lease.
Heavy Vehicles Over 6,000 Pounds
The luxury automobile limits, and therefore the lease inclusion amount, only apply to “passenger automobiles” as defined in the code — four-wheeled vehicles rated at 6,000 pounds gross vehicle weight or less.8Office of the Law Revision Counsel. 26 USC 280F – Limitation on Depreciation for Luxury Automobiles Vehicles above that weight fall outside the definition, which means no depreciation caps and no lease inclusion.
Full-size pickups, large SUVs, and commercial vans commonly clear the threshold. The rating is printed on the driver’s-side door jamb and in the manufacturer’s specs. Check it before signing, because a few hundred pounds can move you from restricted to unrestricted treatment.
Lease a qualifying heavy vehicle and use it 90% for business, and you deduct 90% of the year’s lease payments with no further reduction. That’s the whole calculation. Note that Section 179’s immediate expensing of a heavy vehicle’s full price is available only if you buy it; leasing forecloses that option.
When a “Lease” Is Really a Purchase
Not every contract labeled a lease is one for tax purposes. The IRS separates a true lease from a conditional sales contract, and if your agreement is functionally a financed purchase, the agency treats you as the owner and expects you to claim depreciation rather than deduct lease payments.9Internal Revenue Service. Income and Expenses 7
Factors that push toward conditional sale treatment include:
- Part of each payment builds equity in the vehicle.
- Title passes to you after a set number of payments.
- Payments are significantly higher than fair rental value.
- An end-of-lease buyout option is set at a token amount far below actual value.
- The agreement designates a portion of each payment as interest.
No single factor decides the question; the IRS looks at overall intent. A $1 buyout at the end almost always tips the agreement into purchase territory. That isn’t necessarily bad — it just changes how you file, using Form 4562 for depreciation instead of deducting payments as rent. The dangerous position is claiming lease deductions on what the IRS later recharacterizes as a purchase, which brings back taxes and possible penalties.
A Note for W-2 Employees
Everything above assumes you are self-employed or a business owner. If you are a W-2 employee leasing a vehicle you use for work, you cannot deduct any part of the lease payments on your federal return. The Tax Cuts and Jobs Act suspended unreimbursed employee business expenses as miscellaneous itemized deductions subject to the 2% floor, and 2025 legislation made that suspension permanent.10Office of the Law Revision Counsel. 26 U.S. Code 67 – 2-Percent Floor on Miscellaneous Itemized Deductions Reimbursement under an employer’s accountable plan is the only tax-free path. A narrow exception covers certain Armed Forces reservists and qualifying state or local government officials.
Records the IRS Expects
The IRS requires “contemporaneous” records — documentation created at or near the time of each trip, not reconstructed later. Regardless of method, your log should show four things for every business trip: date, destination, business purpose, and mileage.
Vague entries like “business driving” don’t hold up. Auditors want specifics such as “Client meeting at Smith & Co, 123 Main St.” Without a documented business purpose, the trip is treated as personal by default. Record odometer readings at the start and end of the tax year to support your business-use percentage.
Under actual expenses, keep receipts for fuel, insurance premiums, repair invoices, and each lease payment. Hold on to the lease agreement itself: it establishes the vehicle’s FMV at inception, which determines whether the inclusion amount applies and which row of the table to use. A GPS-based mileage app is the easiest way to build a log that satisfies the contemporaneous standard without daily manual entry.