An inclusion amount is the increase in a taxpayer’s taxable income or reduction in a taxpayer’s deduction with respect to leased listed property used in the taxpayer’s business.
Learn what an inclusion amount is and how it affects your tax return.
Definition and 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.
- 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.
How an Inclusion Amount Works
How an inclusion amount works depends on what kind of listed property you leased: a passenger automobile or non-vehicle listed property, such as property generally used for entertainment, recreation, or amusement that you use in your business.
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 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. 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.
On top of a mileage deduction, you may also deduct any parking fees or tolls incurred in the course of driving your leased car for business.
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.
|Year Lease Began||Vehicle Type||Fair Market Value|
|2018 - 2020||Cars, Trucks, and Vans||$50,000|
|2013 - 2017||Cars||$19,000|
|2010 - 2012||Cars||$18,500|
|2014 - 2017||Trucks and Vans||$19,500|
|2010 - 2013||Trucks and Vans||$19,000|
The actual inclusion amount for your vehicle can be found in the appendices at the back of IRS Publication 463.
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.
|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.|
How an Inclusion Amounts Works for Leased Listed Property Other Than Passenger Automobiles
If a taxpayer’s business-use percentage for leased listed property other than a passenger automobile is 50% or less in any tax year, the taxpayer must increase their income by an inclusion amount for that tax year.
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.
|Activity||Where To Report Inclusion Amount|
|Sole Proprietorship||Include the inclusion amount on Line 6|
|Farming Business||Include the inclusion amount on Line 8|
- 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 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 with a fair market value on their lease date greater than a certain amount.
- For non-passenger-automobile listed property, an inclusion amount has to be included for every year that the business-use percentage of the property is 50% or less.
Internal Revenue Service. "Publication 463 (2020), Travel, Gift, and Car Expenses." Accessed Jan. 6, 2022.
Internal Revenue Service. "Publication 946 (2020), How To Depreciate Property." Accessed Jan. 6, 2022.
Internal Revenue Service. "Topic No. 510 Business Use of Car." Accessed Jan. 6, 2022.
Internal Revenue Service. "Instructions for Form 2106 (2020)." Accessed Jan. 6, 2022.
Internal Revenue Service. "2020 Instructions for Schedule C (2020)." Accessed Jan. 6, 2022.
Internal Revenue Service. "2020 Instructions for Schedule F." Accessed Jan. 6, 2022.