The inclusion amount for passenger automobiles is triggered by the fair market value of the vehicle exceeding a certain amount set by the IRS on the date it was leased. The inclusion amount for listed property other than passenger automobiles is triggered by the business-use percentage of the property being 50% or less for the tax year.

How an Inclusion Amounts Works for Leased Passenger Automobiles

Generally, if you lease a vehicle for business, you are eligible to deduct either of the following:

A standard mileage amount based on how many miles you drove the vehicle for business during the yearYour actual vehicle expenses attributable to business use of the vehicle during the year

A taxpayer will often calculate their deduction under both the standard mileage method and the actual expense method, then use the method that results in the greater deduction. However, if you choose to use the standard mileage method for a leased vehicle in one year, you must use it for all future years on the lease.

Example of Leased Passenger Automobiles Inclusion Amounts

Calculating your deduction based on the standard mileage rate is simple: Take the total number of miles you drove the vehicle for business during the year, then multiply it by the standard mileage rate for the year or other period set by the IRS.  For example, if you drove your vehicle 10,000 miles for business during 2022, and the standard mileage rate is 58.5 cents per mile, you would generally be eligible for a $5,850 vehicle expense deduction if you use the standard mileage rate method, and the inclusion amount does not apply. 10,000 x $0.585 = $5,850 However, if you choose to use the actual vehicle expense method for a leased vehicle, you would sum up the total amount of actual vehicle expenses you incurred during the year. This includes costs such as gas, oil, repairs, and the lease payments themselves. Multiply that amount by the vehicle’s business-use percentage, which is generally calculated as the miles driven in the vehicle for business during the year divided by the total miles driven in the vehicle during the year. For example, say you incurred $12,000 in total vehicle expenses during the year. You drove the car a total of 10,000 miles during the year; 7,500 miles were for business purposes. Your vehicle expense deduction under the actual expense method would be $9,000, apart from the lease inclusion amount. Here’s what that calculation looks like: 7,500 / 10,000 = 0.75 (75%)
0.75 x $12,000 = $9,000 However, you must reduce the amount of this deduction by an inclusion amount. This applies if your vehicle is a passenger automobile such as a car, truck, or van whose fair market value when its lease began was greater than the amount shown in the table below, based on the date its lease began and its vehicle type. You must have used this leased vehicle in your business for at least 30 days during the year. For example, Appendix C-3 shows the inclusion amounts for cars, trucks, and vans first leased in 2020.So let’s say you leased your vehicle in the previous example on Sept. 1, 2020, and it had a fair market value of $71,000. So, there were 122 days between Sept. 1, 2020, and Dec. 31, 2020 and 366 days in 2020. That means you used the vehicle for 33.33% of the year. 122 / 366 = 0.33 (33.33%) You would use the IRS appendix to find your non-prorated lease inclusion amount of $50 for the first tax year of lease for 2020. This amount is then prorated based on the number of days during the year your vehicle was used for business (33.33%) as well as on your vehicle’s business-use percentage. You would get a $12.30 prorated lease inclusion amount. 0.33 (33.33%) x 0.75 (75%) x $50 = $12.50 So in this example, your pre-lease-inclusion deduction amount of $9,000 would be reduced by $12.50 for a final actual vehicle expense deduction of $8,987.50. Where you report the vehicle lease inclusion amount on your tax return depends on what you use the vehicle for. The inclusion amount for this property is derived from the sum of two numbers, “Amount A” and “Amount B.” Those amounts are determined as follows:

Amount A is the fair market value of the listed property on the first day of the lease term multiplied by the business-use percentage for the first tax year that the percentage is 50% or less, multiplied by the applicable percentage for its Alternative Depreciation System (ADS) recovery period found in Table A-19 in Appendix A of IRS Publication 946.Amount B is the fair market value of the listed property on the first day of the lease term multiplied by the average business-use percentage for all tax years the property was leased before the percentage fell to 50% or less, multiplied by the applicable percentage for its ADS recovery period found in Table A-20 in Appendix A of IRS Publication 946.

Example of Inclusion Amounts for Property Other Than Leased Vehicles

Let’s say that on Jan. 1 of last year, you leased a piece of listed property with a seven-year recovery period under ADS. Its fair market value on the day the lease began was $10,000. Last year, you used this property 100% for business use, but this year, you used it 40% for business and 60% for personal use. The Amount A calculation for this piece of property for this year would be: $10,000 x 0.40 (40%) x -0.038 (-3.8% from Table A-19) = - $152
The Amount B calculation for this piece of property or this year would be: $10,000 x 100% x 0.93 (9.3% from Table A-20) = $930
So the inclusion amount for this piece of listed property for this year would be the sum of the -$152 Amount A and the $930 Amount B, which is $778. Note that the inclusion amount for the year cannot exceed the total lease payment amounts for the year. Where you report the non-vehicle lease inclusion amount on your tax return depends on what you use the listed property for.

Alternate name: Lease inclusion amount

For example, if in 2020, you lease a car for business use with a fair market value of greater than $50,000, you can deduct the portion of your lease payments attributable to your business use of the car—but this deduction must be reduced by an inclusion amount set by the IRS.