When you own a business, finding ways to maximize profits and reduce expenses can be a challenge. Any businesses, including an S-Corp, can reduce its tax liability by deducting accepted or necessary expenses associated with business operations, including vehicle use. While you cannot deduct the full amount of a lease payment, the IRS does allow you to deduct most of the cost minus an inclusion amount, or you can deduct your vehicle's cost using standard mileage rates.

Things You Will Need

  • record of lease payments

  • record of business mileage used

Keep detailed records of car usage. The IRS requires businesses to submit supporting documents, like receipts and lease statements when deducting business-related expenses. Likewise, keeping good records of your vehicle costs helps you accurately deduct your expenses.

Choose the appropriate deduction method. Vehicles used exclusively for business can deduct the full amount of lease payments less the inclusion amount, or percentage of the car's fair market value multiplied by the percentage of business use for the year. If your vehicle is used for both personal and business purposes, you can deduct some of your business mileage costs.

Calculate actual car expenses. This is equal to the total amount of your lease payments for the tax year, minus the inclusion amount. IRS Appendix A-6 should be used to determine your inclusion amount. The year the lease began, and the exact amount of days it was used out of 365 days are required to use the appendix. Proceed to step 5.

Calculate mileage deduction using standard mileage rates. For 2011, businesses can deduct 51 cents for each business mile driven. If for example, you drove 20,000 miles during the year and 12,000 of those were for business you can deduct $6,120 (12,000 X $.51). Proceed to step 5.

Submit your corporate income tax filing with your deductions. The exact date your deductions are due depend on your company's fiscal year. Use Form 1120S, 1120S Schedule K-1, or 1120-W and 8109.

Tip

Expenses like insurance, repairs, registration fees and others may also be deductible depending on the method used to calculate car expenses.

Warning

Actual cost and standard mileage rate deductions cannot both be used in the same tax year. Verify the criteria you use to formulate your deduction at the IRS website before submitting your return