Leasing cars for personal use won’t automatically guarantee you tax deductions on the expenses, however, if you drive the car for business purposes, you may be able to write off some of the costs. Miles driven to run your business or carry out your work are usually deductible. Mileage from home to work does not count as a deduction as the IRS considers this a commute.
This article discusses car lease deduction for independent contractors who use their personal vehicles for business purposes. Read on to see if this applies to your situation -- especially if you are deciding between buying or leasing a car to use for your business.
Note: if you want to discover all the deductions you qualify for, try Bonsai Tax. Our software will scan your bank/credit card statements to discover all the potential tax deductions you can claim. In fact, users typically save $5,600 from their tax bill with our app. Try a 14-day free trial today.
Owned or leased, a personal vehicle used for work entitles freelancers to certain deductions. In fact, a sizable car lease can lead to a significant business deduction.
If you are an independent contractor / sole proprietor freelancer / any other "non-salaried 1099 worker" and you use an owned or leased vehicle for business purposes in addition to personal use, you likely qualify for a car lease tax deduction.
When it comes to deducting general car expenses, the business owner has two options to choose from: the standard mileage rate method and the actual expense method (also known as "actual cost method") -- but only the latter allows specifically for car lease payment deductions.
Each deduction rate comes with its own advantages/disadvantages and it's up to the taxpayer to decide/calculate whether they prefer to use the standard mileage rate or claim actual expenses. Let's quickly review both ways.
The standard mileage rate is a way to deduct "business mileage" (as opposed to "personal mileage" which applies to miles driven for personal use and does not qualify for a write-off). This plan does not allow for other itemized travel write-offs, other than qualifying parking and road fees. However, the wider cost of operating a vehicle is factored into the fixed annual mileage rates set by the Internal Revenue Service (IRS) and the General Services Administration (GSA).
In 2022, you can deduct 58.5 cents per business mile under the standard mileage rate method (and don't forget to log your business miles!)
Those who wish to use the "standard mileage rate" deduction must do so from the start: they can later switch to "actual expenses", but it does not work the other way around.
Another caveat is that, if the taxpayer wants to deduct standard mileage on a leased car, they must get on the program from the first year they lease their car -- and stay on it for all future years of the lease and its renewals.
The actual costs method is an itemized expense-tracking approach that lets the independent contractor deduct several car expenses, such as:
The "actual cost" method relies on the percentage of the business portion of the car usage. Say, your business use is 60 percent and you are making a monthly payment of $400 on it: you can write off $240 for every single lease payment (the same formula applies to the other car expenses in the above list -- gas, insurance, depreciation, etc. -- you ought to be deducting too!)
If you made a down payment at the signing of the car lease, you can deduct this cost as well, as long as you break it up into equally distributed payments over the entire lease period (but watch out for IRS' annual lease limits!)
While technically requiring more book-keeping (make sure to save your business expense receipts!), this method often leads to greater tax savings.
You can only deduct the entire lease payment if you use your vehicle exclusively for business 100 percent of the time.
If you are considering getting a new vehicle, it's worth pondering the tax implications in car buying vs. car leasing.
As a self-employed worker, the main advantage of leasing a car is that you are allowed to deduct lease payments in the way you couldn't deduct a car payment for a loan amount.
On the other hand, if you buy a new car, as long as you use it for business at least 50 percent of the time, you are allowed to deduct its depreciation value over the course of five years with the actual expense method.
When you lease a car, you simply return the car at the end of the term. End of story.
When you sell a car you owned, you may end up with a taxable gain (if your car was fully depreciated), or a "deductible loss", if the un-depreciated cost of the car exceeds the sale returns.
Fun fact: a car lease consists of depreciation value with interest and fees. As you can see: whether you lease or buy a new business vehicle, one way or another, there is an opportunity to deduct its depreciation value and associated costs as a freelancer.
Therefore, in deciding what is more profitable, other factors about your small business goals and practices play a role. Here are some general rules of thumb:
It's better to buy if:
It's better to lease if:
If you expect to be leasing a car soon, you may also be able to deduct the sales tax on your new car lease (the only states with no sales tax are Alaska, Delaware, Montana, New Hampshire or Oregon). This is known as the State And Local Tax (SALT) deduction (which also allows for real estate taxes, property taxes and other sales taxes write offs), with an annual cap of $10,000. The taxpayer needs to choose between the state sales tax deduction and the income tax write-off as they can't claim both (the IRS provides a calculator to help figure out the sales tax deduction).
While it may seem like a lot, tracking one's business expenses and being on top of quarterly and annual taxes is essential for the success of small businesses and solopreneurs. It keeps more of your heard-earned income in your own pocket/business by taking advantage of legitimate tax breaks.
When your hands are full with contract work, it's smart and healthy for your business to get help with tax advice, bureaucratic busywork and complex sorting and calculations.
Short of hiring a personal tax professional, the Bonsai Tax app is your best bet. Designed specifically for independent contractors, its expense tracker will record, import and sort each qualifying business expense into appropriate categories. The tax app will figure out deductions, calculate quarterly tax payments, issue expense reports, and populate all the appropriate online tax return forms with all the relevant personal and financial data to make it super-simple to file at the end of the tax year.
A verbal contract (formally called an oral contract) refers to an agreement between two parties that's made —you guessed it— verbally.
Formal contracts, like those between an employee and an employer, are typically written down. However, some professional transactions take place based on verbally agreed terms.
Freelancers are a good example of this. Often, freelancers will take on projects having agreed on the terms and payment via the phone, or an email. Unfortunately, sometimes clients don't pull through on their agreements, and hardworking freelancers can find themselves out of pocket and wondering whether a legal battle is worth all the hassle.
The main differences between written and oral contracts are that the former is signed and documented, whereas the latter is solely attributed to verbal communication.
Verbal contracts are a bit of a gray area for most people unfamiliar with contract law —which is most of us, right?— due to the fact that there's no physical evidence to support the claims made by the implemented parties.
For any contract (written or verbal) to be binding, there are four major elements which need to be in place. The crucial elements of a contract are as follows:
Therefore, an oral agreement has legal validity if all of these elements are present. However, verbal contracts can be difficult to enforce in a court of law. In the next section, we take a look at how oral agreements hold up in court.
Most business professionals are wary of entering into contracts orally because they can difficult to enforce in the face of the law.
If an oral contract is brought in front of a court of law, there is increased risk of one party (or both!) lying about the initial terms of the agreement. This is problematic for the court, as there's no unbiased way to conclude the case; often, this will result in the case being disregarded. Moreover, it can be difficult to outline contract defects if it's not in writing.
That being said, there are plenty of situations where enforceable contracts do not need to be written or spoken, they're simply implied. For instance, when you buy milk from a store, you give something in exchange for something else and enter into an implied contract, in this case - money is exchanged for goods.
There are some types of contracts which must be in writing.
The Statute of Frauds is a legal statute which states that certain kinds of contracts must be executed in writing and signed by the parties involved. The Statute of Frauds has been adopted in almost all U.S states, and requires a written contract for the following purposes:
Typically, a court of law won't enforce an oral agreement in any of these circumstances under the statute. Instead, a written document is required to make the contract enforceable.
Contract law is generally doesn't favor contracts agreed upon verbally. A verbal agreement is difficult to prove, and can be used by those intent on committing fraud. For that reason, it's always best to put any agreements in writing and ensure all parties have fully understood and consented to signing.
Verbal agreements can be proven with actions in the absence of physical documentation. Any oral promise to provide the sale of goods or perform a service that you agreed to counts as a valid contract. So, when facing a court of law, what evidence can you provide to enforce a verbal agreement?
Unfortunately, without solid proof, it may be difficult to convince a court of the legality of an oral contract. Without witnesses to testify to the oral agreement taking place or other forms of evidence, oral contracts won't stand up in court. Instead, it becomes a matter of "he-said-she-said" - which legal professionals definitely don't have time for!
If you were to enter into a verbal contract, it's recommended to follow up with an email or a letter confirming the offer, the terms of the agreement , and payment conditions. The more you can document the elements of a contract, the better your chances of legally enforcing a oral contract.
Another option is to make a recording of the conversation where the agreement is verbalized. This can be used to support your claims in the absence of a written agreement. However, it's always best to gain the permission of the other involved parties before hitting record.
Fundamentally, most verbal agreements are legally valid as long as they meet all the requirements for a contract. However, if you were to go to court over one party not fulfilling the terms of the contract, proving that the interaction took place can be extremely taxing.
So, ultimately, the question is: written or verbal agreements?
Any good lawyer, contract law firm, or legal professional would advise you to make sure you formalize any professional agreement with a written agreement. Written contracts provide a secure testament to the conditions that were agreed and signed by the two parties involved. If it comes to it, a physical contract is much easier to eviden in legal circumstances.
Freelancers, in particular, should be aware of the extra security that digital contracts may provide. Many people choose to stick to executing contracts verbally because they're not sure how to write a contract, or they think writing out the contract terms is too complicated or requires expensive legal advice. However, this is no longer the case.
Today, we have a world of resources available at our fingertips. The internet is a treasure trove of invaluable information, platforms, and software that simplifies our lives. Creating, signing, and sending contracts has never been easier. What's more, you don't have to rely on a hiring a lawyer to explain all that legal jargon anymore.
There are plenty of tools available online for freelancers to use for guidance when drafting digital contracts. Tools like Bonsai provide a range of customizable, vetted contract templates for all kinds of freelance professionals. No matter what industry you're operating in, Bonsai has a professional template to offer.
A written contract makes the agreement much easier to prove the terms of the agreement in case something were to go awry. The two parties involved can rest assured that they're legal rights are protected, and the terms of the contract are sufficiently documented. Plus, it provides both parties with peace of mind to focus on the tasks at hand.
Bonsai's product suite for freelancers allows users to make contracts from scratch, or using professional templates, and sign them using an online signature maker.
With Bonsai, you can streamline and automate all of the boring back-office tasks that come with being a freelancer. From creating proposals that clients can't say no to, to sealing the deal with a professional contract - Bonsai will revolutionize the way you do business as a freelancer.
Why not secure your business today and sign up for a free trial?