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Buying Out An Automobile Lease

You have leased a car and have been using for business purposes. You have kept proper records and have are deducting the leasing costs from your income. However, your lease comes due and you decide to buy it out. Can you deduct the buyout payment?

Leases & Tax Deductions

If you lease a vehicle and use the vehicle for business or are required by your employer to use a vehicle for business, you may be able to deduct the lease payments subject to some limitations. These limits include a cap on the amount of the lease payment and denying access to the capital cost allowance deductions related to the vehicle.

Owned Vehicles & Tax Deductions

If you own your vehicle and use for self-employment or are required by your employer to use you vehicle for business, you can deduct a portion of the capital cost of the vehicle annually (capital cost allowance) and any interest on loans used to acquire the vehicle.

Side Note: Be aware that with both leased and owned vehicles you can only deduct the business use portion of the vehicle and you should keep accurate records.

Capital Purchases Not Deductible

When you purchase capital property you are exchanging capital property (cash for a car). Capital property cannot be deducted but depreciable capital property can be partially deducted if it is used for business purposes (a car is depreciable capital property).

Putting These Together

When you lease your vehicle used for business purposes you can deduct the lease payment but not the capital cost allowance. When you buyout the lease you are purchasing depreciable property and this expenditure cannot be deducted. However, after the buyout, a portion of the capital cost (the buyout amount) is deductible and any interest on loans will be deductible.