What it means
When a business buys an expensive car, the tax rules limit how much depreciation can be claimed each year. If a business leased the same car, it could deduct the full lease payments with no such limit, which would be a way around the cap.
The inclusion amount closes that gap by reducing the lease deduction. It works by adding a figure to income, which has the same effect as reducing the deduction.
The figure comes from tables published by the tax authority, based on the fair market value of the vehicle when the lease starts and on which year of the lease the taxpayer is in. Only vehicles above a set value threshold are caught, and the threshold and table values are updated regularly.
The amount is prorated for the part of the year the lease was in effect. A vehicle leased for 73 days of a 365-day year only carries 73 / 365 of the annual table figure.
It is then scaled by the percentage of business use, since only the business share of the lease is deducted in the first place. For finance managers, the practical point is that leasing a luxury vehicle does not avoid the limit that applies to buying one.
The inclusion amount is usually small relative to the lease payments, so the lease deduction still gives a benefit, but the benefit is smaller than it first looks. Fleet policies should be tested on after-tax cost and not on the headline payment.
Records are essential. The business needs the vehicle's fair market value at the start of the lease, the lease dates, a log showing business versus personal use and the applicable table.
Without them, the deduction is easy for the tax authority to challenge. The rules can differ for heavier vehicles above a set weight or for those used almost entirely for business, such as taxis or delivery vans.
Anyone leasing a vehicle should check the current tables and the exceptions, since both change over time.
In practice
Real-world examples.
Example
A consultant leases a luxury sedan for his business and uses it 90% for work. Each year he looks up the table amount for the car's value, prorates it for the days of the lease and adds 90% of that figure to his income.
Example
A design studio signs a three-year lease on a high-value vehicle for its director. The accountant calculates the inclusion amount for each lease year, because the table amounts change as the lease progresses.
Example
A firm compares buying and leasing a vehicle with a value above the threshold. The tax adviser shows that leasing saves less than the lease payments suggest once the inclusion amount is added back.
Formula
Calculation
Inclusion amount = table amount x (days of lease in the tax year / days in the year) x business use percentage
Suppose the published table amount for a vehicle's value and lease year is $100 (a round figure used only for illustration), the vehicle is leased for 73 days in the first tax year, and business use is 80%. The prorated amount is 100 x 73 / 365 = $20. Applying business use gives 20 x 0.80 = $16, which is added to income for the year.Case study
Seen in the real world.
Fairview Property Consultants is an illustrative, fictional firm whose partner leased an expensive car for 12 months, with business use of 75%. Lease payments were $18,000 for the year, and the firm planned to deduct 75% of them, or $13,500.
The accountant found the table amount for that vehicle and lease year was $150, and the lease ran for the full year. The inclusion amount was 150 x 1.0 x 0.75 = $112.50, which the firm added to its taxable income.
The adjustment was small, but missing it would have meant an incorrect return and a possible penalty on review. The illustrative lesson is that the inclusion amount is not large, but it is a required step, and failing to apply it exposes the business to avoidable risk.
Watch out
Common mistakes.
- Deducting the full lease payments on a high-value vehicle without adding back the inclusion amount.
- Using last year's table, when the tax authority publishes new tables regularly.
- Forgetting to prorate the amount for the days of the lease or to apply the business use percentage.
Questions
People also ask.
Who has to calculate an inclusion amount?
A taxpayer who leases a vehicle above the value threshold and uses it in a business or for income-producing purposes.
Where do I find the table amounts?
They are published by the tax authority, usually in a revenue procedure or guidance document, and updated for each year.
Does the inclusion amount apply to purchased vehicles?
No, it applies to leased vehicles, because purchased vehicles are subject to separate limits on depreciation.
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