How To Calculate Inclusion Amounts on Vehicle Leases

If you lease a car that you use in your business for a lease term of 30 days or more, you may have to include an inclusion amount in your income for each tax year you lease the car. To do this, you do not add an amount to income. Instead, you reduce your deduction for your lease payment. (This reduction has an effect similar to the limit on the depreciation deduction you would have on the car if you owned it.)

The inclusion amount is a percentage of part of the fair market value of the leased car multiplied by the percentage of business and investment use of the car for the tax year. It is prorated for the number of days of the lease term in the tax year.

The inclusion amount applies to each tax year that you lease the car if the fair market value (defined next) of the car when the lease began was more than the amounts shown in the following table.

	Year Lease Began	Fair Market Value*
	1999	$ 15,500
	1997-1998	15,800
	1995-1996	15,500
	1994	14,600
	1993	14,300
	1992	13,700
	1991	13,400
	1987-1990	12,800
*These amounts are higher for electric cars. Click "Next" below for more information on this topic. The Vehicle Mileage & Maintenance Record Book is designed for busy professionals like you who are tired of cheap tax information recording tools that fall apart and don't provide adequate room on forms for writing. Order one of our auto mileage logs today and start making this essential task simple and quick. Each book comes with a MONEY BACK GUARANTEE!  Click here to order by using our online shopping cart, downloadable order form, or through Amazon.com.

Fair market value. Fair market value is the price at which the property would change hands between a buyer and a seller, neither having to buy or sell, and both having reasonable knowledge of all the necessary facts. Sales of similar property around the same date may be helpful in figuring the fair market value of the property.

Figure the fair market value on the first day of the lease term. If the capitalized cost of a car is specified in the lease agreement, use that amount as the fair market value.

Figuring the inclusion amount. Inclusion amounts are listed in Appendix B and, for electric cars leased after August 5, 1997, in Appendix C. If the fair market value of the car is $100,000 or less, use the appropriate appendix (depending on the year you first placed the car in service) to determine the inclusion amount. If the fair market value is more than $100,000, see the Revenue Procedure(s) identified in the footnote of the appendices for the inclusion amount. Revenue Procedures are available at most IRS offices and many local libraries.

For each tax year during which you lease the car for business, determine your inclusion amount by following these three steps.

1.      Locate the appendix that applies to you. To find the inclusion amount, do the following.

a.       Find the line that includes the fair market value of the car on the first day of the lease term.

b.      Go across the line to the column for the tax year in which the car is used under the lease to find the dollar amount. For the last tax year of the lease, use the dollar amount for the preceding year.

2.      Prorate the dollar amount from (1)(b) for the number of days of the lease term included in the tax year.

3.      Multiply the prorated amount from (2) by the percentage of business and investment use for the tax year. This is your inclusion amount.

Click "Next" below for additional information on this topic.

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Example. On January 17, 1997, you leased a car for 3 years and placed it in service for use in your business. The car had a fair market value of $32,250 on the first day of the lease term. You use the car 75% for business and 25% for personal purposes during each year of the lease. Assuming you continue to use the car 75% for business, you use Appendix B-3 to arrive at the following inclusion amounts for each year of the lease:

Leased car changed from business to personal use. If you lease a car for business use and, in a later year, change it to personal use, follow the rules explained earlier under Figuring the inclusion amount. For the tax year in which you stop using the car for business, use the dollar amount for the previous tax year. Prorate the dollar amount for the number of days in the lease term that fall within the tax year.

Example. On August 16, 1998, Will leased an electric car with a fair market value of $58,600 for 3 years. He used the car exclusively in his own data processing business. On November 5, 1999, Will closed his business and went to work for a company where he is not required to use a car for business. Using Appendix C-2, Will computed his inclusion amount for 1998 and 1999 as shown in the following table.

Leased car changed from personal to business use. If you lease a car for personal use and, in a later year, change it to business use, you must determine the car's fair market value on the date of conversion. Then figure the inclusion amount using the rules explained earlier under Figuring the inclusion amount. Use the fair market value on the date of conversion.

Example. In March 1997, Janice leased a car for 4 years for personal use. On June 1, 1999, she started working as a self-employed advertising consultant and started using the leased car for business purposes. Her records show that her business use for June 1 through December 31 was 60%. To figure her inclusion amount for 1999, Janice obtained an appraisal from an independent car leasing company that showed the fair market value of her 1997 car on June 1, 1999, was $18,650. Using Appendix B-1, Janice computed her inclusion amount for 1999 as shown in the following table.

The Vehicle Mileage & Maintenance Record Book is designed for busy professionals like you who are tired of cheap tax information recording tools that fall apart and don't provide adequate room on forms for writing. Order one of our auto mileage logs today and start making this essential task simple and quick. Each book comes with a MONEY BACK GUARANTEE!  Click here to order by using our online shopping cart, downloadable order form, or through Amazon.com.