If you use a leased vehicle for business, you may be able to deduct the business portion of your actual vehicle expenses on your tax return. The actual expense method lets you deduct the costs of operating the vehicle instead of using the standard mileage rate.
For tax year 2026 (returns filed in 2027), you'll need to keep records of your vehicle expenses and your business mileage to calculate the deductible amount.
What Expenses Can Be Included?
When using the actual expense method for a leased vehicle, you can generally include:
- Lease payments
- Gas and oil
- Repairs and maintenance
- Tires
- Insurance
- Vehicle registration fees
- Licenses
- Garage rent or parking related to business use
- Car washes and detailing related to maintaining the vehicle
- Other operating expenses
If you use the vehicle for both personal and business purposes, only the business-use percentage is deductible.
How Do I Calculate the Business Portion?
First, determine your total miles driven during the year and your business miles.
Use this formula:
Business Miles ÷ Total Miles = Business-Use Percentage
Then multiply your total vehicle expenses by that percentage.
Example:
- Total miles driven: 20,000
- Business miles: 12,000
- Business-use percentage: 60%
- Total vehicle expenses: $8,000
Deductible business expense:
$8,000 × 60% = $4,800
Special Rule for Leased Vehicles
If you use the actual expense method for a leased vehicle, you generally must continue using that method for the entire lease period, including lease renewals. You can't switch back and forth between the actual expense method and the standard mileage rate during the same lease term.
Some higher-value leased vehicles may also require an inclusion amount, which slightly reduces the allowable deduction. Tax software will generally calculate this amount automatically when applicable.
How Do I Report the Deduction?
The leased vehicle's actual expenses are reported in the Depreciation section of Schedule C or F. Self-employed individuals generally report vehicle expenses on Schedule C, whereas farmers report them on Schedule F.
Use the guide below to complete the Depreciation section and report a leased vehicle's actual expenses:
- Description: Enter the make and model of the leased vehicle.
- Date placed in service: This is the date you started using the vehicle for the Schedule C/F work.
- Cost: Enter $1
- Percentage of business use: Enter 100 (note this entry does not determine the actual percentage of business use).
- Section 179 deduction: Leave blank.
- Prior year special depreciation: Leave blank.
- Accumulated depreciation: Leave blank.
- Depreciation method: Choose MACRS 5 year 200%.
- Special Depreciation: Check the box to opt out.
- Listed Property Information: Select Auto from the dropdown.
- Listed Auto Information: Enter the corresponding mileage (these amounts determine the actual percentage of business use).
- Actual Expenses: Enter your leased vehicle's actual expenses for the tax year.
- Check if any of the boxes at the bottom of the page apply to you, then press continue to save the information to your return.
What Records Should I Keep?
Keep documentation that supports both your expenses and your business use, including:
- Lease agreements
- Receipts for gas, repairs, insurance, and maintenance
- Registration and licensing records
- A mileage log showing business and personal miles driven
Good records can help support your deduction if the IRS asks for additional information.