DEFINITION of Inclusion Amount
Inclusion amount is an additional amount of income that a taxpayer may have to report if he or she leased a vehicle or other property for business purposes. The inclusion amount must be reported if the fair market value of the leased asset exceeds a certain threshold.
BREAKING DOWN Inclusion Amount
A taxpayer that leases a car for business-related purposes can take advantage of benefits that the Internal Revenue Service (IRS) offers for lessees. The amount of car expense that can be deducted depends on the extent it is used for business. A leased vehicle used for both personal and business activities can only have expenses on the business side deducted. In some cases, an additional fee, known as the inclusion amount, is applied to a leased vehicle to reduce the tax deduction. The fixed dollar amount, which is issued annually by the IRS, balances out the tax difference between depreciating the vehicle and writing off the lease. While this amount decreases the lease payment deduction, it does not increase income.
The amount to be included in income depends on the auto’s fair market value (FMV) on the first day of the lease term. FMV is the price at which the property would change hands between a willing buyer and seller in an arm’s length transaction. It is equal to the capitalized cost of the auto specified in the lease agreement. The inclusion amount is calculated by finding the dollar amount on a price-based table provided by IRS Publication 463. This derived amount is prorated for the number of days of the lease term in the tax year.
For example, let’s assume a business owner leases a truck with an FMV of $30,000 on the first day of the lease term, which is March 2, 2017. The lessee uses the truck 80% for business. The dollar amount stated in the IRS Publication for trucks first leased in 2017 with an FMV of $30,000 is $21. The total number of days between March 2 to December 31, 2017 is 305 days. The prorated dollar amount is, therefore, $21 x (305/365) = $17.55. Since the lessee used the car 80% for business purposes, the inclusion amount for the first lease year is $17.55 x 0.80 = $14.04.
The inclusion amount will differ according to the type of property or equipment that is leased; the inclusion amount for cars is different than the rate applied to office equipment or computers. Car leases require that an inclusion amount be included for every year that a vehicle is leased, while other properties need an inclusion amount only if the business usage drops to 50% or less during the year. This amount must be considered by taxpayers that have leased a vehicle for a term of 30 days or more.
The inclusion amount is designed to limit the deduction amount a taxpayer can claim to the amount that would be deductible as depreciation if the taxpayer owned the vehicle or equipment. This prevents the taxpayer from being able to deduct the entire amount of the larger lease payment versus the lesser amount of the depreciation. In fact, the inclusion was introduced by the IRS to prevent individuals from avoiding the luxury car depreciation limits that apply to purchased vehicles. The inclusion amount is a stipulated limit on how much an individual can depreciate a luxury vehicle per year. For tax purposes, the IRS defines a luxury vehicle as a four-wheeled vehicle with an unloaded gross weight of 6,000 pounds or less driven mostly on public roads. Dollar-wise, a luxury vehicle is defined as one in which the fair market value (FMV) exceeds $15,800 for a passenger automobile or $16,800 for a truck or van. Clearly, this definition encompasses the majority of all cars.