Taxes

What Is an Inclusion Amount?

Updated on March 4, 2023

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A smiling person behind the wheel of a car on a business trip. — Photo:
Adam Hester / Getty Images

Definition

An inclusion amount is an increase in a taxpayer’s taxable income or a reduction in their deduction when they used leased listed property in their business.

Key Takeaways

An inclusion amount is an amount that a taxpayer must include in their taxable income for the year, either as other income or as a reduction to their lease tax deduction.
Leased listed property must meet certain criteria set by the IRS.
Inclusion amounts are reported differently depending on what kind of listed property was leased and in what kind of activity it was used.
An inclusion amount reduces the lease deduction for passenger automobiles that have a fair market value on their lease date greater than a certain amount.
An inclusion amount for non passenger automobile listed property must be included for every year that the business-use percentage of the property is 50% or less.

How an Inclusion Amount Works

The effect of an inclusion amount depends on what kind of listed property you've leased: a passenger automobile or non-vehicle listed property. This is property that's generally used for entertainment, recreation, or amusement as well as in your business.

The inclusion amount for passenger automobiles is triggered by the fair market value of the vehicle that exceeds a certain amount that's set by the Internal Revenue Service (IRS) based on the date the vehicle was leased. The inclusion amount for listed property other than passenger automobiles is triggered by the business-use percentage of the property when it's 50% or less for the tax year.

Example of an Inclusion Amount

An inclusion amount is an increase in a taxpayer’s income or reduction in a taxpayer’s deduction for listed property used in the taxpayer’s business. Listed property is property used for both business and personal use, such as a car or a camera that is used by a business and for non-business purposes.

You can deduct the portion of your lease payments attributable to your business use of the car if you leased a car for business purposes in 2022 and its fair market value was greater than $56,000. But this deduction must be reduced by an inclusion amount set by the IRS.

Leased Passenger Automobiles

You're generally eligible to deduct either of the following if you lease a vehicle for business:

A standard mileage amount based on how many miles you drove the vehicle for business during the year
Your 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. But you must use the standard mileage method in all future years of the lease if you choose to use that method in one year.

Leased Passenger Automobile Deduction Calculations

You can calculate your deduction based on the standard mileage rate by starting with the total number of miles you drove the vehicle for business during the year. Then multiply this by the standard mileage rate for the year or other period that's set by the IRS and adjusted annually to keep pace with inflation.

Note

You can also deduct any parking fees or tolls you incur in the course of driving your leased car for business.

You would generally be eligible for a $5,850 vehicle expense deduction if you drove your vehicle 10,000 miles for business during 2022 when the standard mileage rate for business purposes was 58.5 cents per mile: 10,000 x $0.585 = $5,850. This assumes that you use the standard mileage rate method and the inclusion amount doesn't apply.

You would sum up the total amount of the actual vehicle expenses you incurred during the year if you choose to use the actual vehicle expense method for a leased vehicle. This includes costs such as gas, oil, repairs, and the lease payments. Multiply that amount by the vehicle’s business-use percentage, which is generally calculated as the miles driven during the year in the vehicle for business purposes divided by the total miles driven in the vehicle during the year.

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, and 7,500 of those miles were for business purposes. Your vehicle expense deduction under the actual expense method would be $9,000, apart from the lease inclusion amount. The calculation would look like this: 7,500 / 10,000 = 0.75 (75%), then 0.75 x $12,000 = $9,000.

The Leased Passenger Automobile Inclusion Amount

You must reduce the amount of your deduction by an inclusion amount if your vehicle is a passenger automobile such as a car, truck, or van with a fair market value when the lease began that was greater than the amount shown in this table. The amount is based on the date the lease began and the vehicle type. You must have used this leased vehicle in your business for at least 30 days during the tax year.

Year Lease Began	Fair Market Value
2022	$56,000
2021	$51,000
2018 - 2020	$50,000
2013 - 2017	$19,000
2010 - 2012	$18,500
2014 - 2017	$19,500
2010 - 2013	$19,000

Let’s say you leased your vehicle on Sept. 1, 2022 and it had a fair market value of $71,000. There were 122 days between Sept. 1, 2022 and Dec. 31, 2022 and there are 356 days in a year. You therefore used the vehicle for 34.26% of the year: 122 / 356 = 0.3426 (34.26%).

Use the IRS appendix to find your non-prorated lease inclusion amount of $19 for the first tax year of your lease, or 2022. This amount is then prorated based on the number of days during the year your vehicle was used for business (34.26%) as well as on your vehicle’s business-use percentage. You would get a $12.30 prorated lease inclusion amount: 0.34 (34.26%) x 0.75 (75%) x $19 = $4.84.

Your pre-lease inclusion deduction amount of $9,000 would be reduced by $4.84 in this example for a final actual vehicle expense deduction of $8,995.16: $9,000 - $4.84 = $8.995.16.

How To Report the Inclusion Amount

Where you report the vehicle lease inclusion amount on your tax return depends on the purpose for which you use the vehicle.

Activity	Where To Report Inclusion Amount
Employment as an Armed Forces Reservist, qualified performing artist, fee-basis state or local government official, or as someone with a disability claiming impairment-related work expenses	Reduce the amount reported on Form 2106, Section C, Line 24b by the inclusion amount.
Sole Proprietorship	Reduce the amount reported on Schedule C, Line 20a by the inclusion amount.
Farming Business	Reduce the amount reported on Schedule F, Line 24a by the inclusion amount.

Inclusion Amounts for Other Leased Property

A taxpayer must increase their income by an inclusion amount for that tax year if their business-use percentage for leased listed property other than a passenger automobile is 50% or less. The inclusion amount for this property is derived from the sum of two numbers: “Amount A” and “Amount B.” These 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. This is then 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 that the property was leased before the percentage fell to 50% or less. This is then multiplied by the applicable percentage for its ADS recovery period found in Table A-20 in Appendix A of IRS Publication 946.

Let’s say you leased an item of listed property on Jan. 1. It has 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 you used it 40% for business and 60% for personal use this year.

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.

The inclusion amount for this piece of listed property for the year would be the sum of the -$152 Amount A and the $930 Amount B, which is $778. The inclusion amount for the year cannot exceed your total lease payment amounts for the year.

Where you report the non-vehicle lease inclusion amount on your tax return depends on the purpose for which you used the listed property.

Activity	Where To Report Inclusion Amount
Sole Proprietorship	Include the inclusion amount on Line 6 of Schedule C
Farming Business	Include the inclusion amount on Line 8 of Schedule F

Frequently Asked Questions (FAQs)

What is non-vehicle listed property?

Non-vehicle listed property is that which you don't drive, as the name suggests. It's typically used for entertainment, recreation, or amusement when you're not using it for business purposes.

How do I claim a business tax deduction for a vehicle?

You must choose between claiming a standard mileage amount based on how many miles you drove the vehicle for business during the year or a percentage of your actual vehicle expenses based on the percentage of miles you drove it for business purposes. You must use the standard mileage method in all future years if you choose to use that method in any given year.

Most taxpayers will claim the deduction on Schedule C along with their other business expenses and file the schedule with their tax returns.

What if I don't use my car for personal driving at all?

You can generally deduct the entire cost of the vehicle in this case, again using either the standard mileage rate for each mile of business driving or the actual expense method. But some restrictions apply, such as if your business is a taxi or Uber operation and you operate five or more cars in the course of business during the year.

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Sources

The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.

IRS. "Publication 946 How To Depreciate Property."
IRS. "Publication 463 Travel, Gift, and Car Expenses."
IRS. "Topic No. 510 Business Use of Car."