Cars parked in a row
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You Can Lower Your Tax Bill by Leasing a Business Car

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Feb. 22 2022, Published 10:30 a.m. ET

When it comes to acquiring a car for personal or business use, you may decide to lease or buy it. Whereas drivers continue to debate about whether buying a car is better than leasing, many times the choice comes down to your circumstances. If you’re considering leasing, you may be wondering whether you pay taxes on a leased car.

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In leasing, you agreed to make a monthly payment to use a car for a set period. You’re required to return the car once lease runs its course. In some cases, you may have an option to buy the vehicle at the end of the lease.

A variety of factors go into calculating the cost of a car lease, including your credit score. With a good score, you may get favorable terms on your lease downpayment and monthly payments. A bad score may not lock you out of a car lease, but you may have to bear a greater burden.

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leased car
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Should you buy or lease a car?

Most people take loans to fund a car purchase. The arrangement often requires you to repay the loan over a number of years. You own the car once you finish repaying the auto loan, and you can sell it or keep it.

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On the other hand, leasing a car often requires a downpayment and monthly payments throughout the lease. The monthly payments for a lease are usually lower than monthly payments on an auto loan. The vehicle won’t become yours at the end of the day, though you may have an option to buy it.

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Your circumstances determine whether buying or leasing a car makes the most sense. Sometimes the car you want may be too expensive for you even with an auto loan. In that case, you may decide to lease instead. Those who want to change cars every year to drive the latest model may also prefer leasing to buying.

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Do you pay taxes on a leased car?

In most states, both car purchases and leases are subject to sales tax. In car leasing, how the sales tax is calculated and when it needs to be paid may vary from state to state. In some states, the tax is applied to the full value of the leased car. Some states may charge the tax on the lease downpayment. In other states, the tax only applies to the monthly payments during the lease period. While some states may require you to pay the tax upfront, oftentimes the tax is included in the monthly payments.

Leased car tax deductions

If you’re leasing a car for business use, you may be able to write off the vehicle’s operating costs in your federal taxes and lower your tax bill. You may use the actual expense deduction or the standard mileage deduction. However, bear in mind that if you use the car for both personal and for business reasons, you can only deduct costs associated with the business use on your federal taxes.

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