Q&A: Handling Leases for Car Allowances
Accounting for this type of option for vehicles.

Our church provides an auto allowance budget line item for vehicle expenses for our pastor. The pastor leases a vehicle that he uses for church-related business. He has asked to use the budget line for reimbursement of the expenses associated with the leased vehicle's use.

The pastor submits receipts for expenses associated with the leased vehicle for reimbursement (i.e. lease payments and maintenance). What are the IRS guidelines in such an instance?

If you lease a car that you use in your ministry, you can use the standard mileage rate or actual expenses to figure your deductible car expenses. You can deduct the part of each lease payment that is for the use of the car in your business. You cannot deduct any part of a lease payment that is for personal use, such as commuting. You must spread any advance payments over the entire lease period. You cannot deduct any payments you make to buy a car, even if the payments are called lease payments. 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 of the car when the lease began was more than the amounts shown in Table 7-4.

Fair market value is the price at which the property would change hands between a buyer and 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.

Inclusion amounts are listed in tables reproduced in IRS Publication 463. For each tax year during which you lease the car for business, determine your inclusion amount by locating the applicable appendix in Publication 463. To find the inclusion amount, do the following: (1) Find the line that includes the fair market value of the car on the first day of the lease term. (2) 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. (3) Prorate the dollar amount for the number of days of the lease term included in the tax year. (4) Multiply the prorated amount by the percentage of business use for the tax year. This is your inclusion amount.

–Pages 274-275, the 2011 Church & Clergy Tax Guide.

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