Buying Out a Business Vehicle Lease: Basis, Depreciation & the Bonus Depreciation Rule (2026)

Published: September 25, 2026 · Reading time: 12 min

TL;DR: When you exercise a genuine lease-end purchase option, IRC §1012 sets your basis at the price you actually pay — not the car's original price, and not anything the leasing company carried on its books. That makes §179 available for the first time on this vehicle, because an arm's-length buyout satisfies §179(d)(2)(A)–(C)'s purchase test outright. More surprisingly, 100% bonus depreciation is available too, despite years of driving the car as a lessee — Treas. Reg. §1.168(k)-2(b)(3)(iii) defines the disqualifying "prior use" as having held a depreciable interest, and a lessee under a genuine lease never holds one; the leasing company does. In the worked example below, a photographer buying out a 36-month lease for $21,000 (plus sales tax) ends up with a $17,808 depreciable basis. Taking 100% bonus depreciation runs into the §280F cap at $16,240 — still $12,678.40 more than the no-bonus MACRS alternative — and the $1,568 the cap disallowed doesn't vanish; it resurfaces as a deduction in the first tax year after the vehicle's 5-year recovery period ends.

Most vehicle-basis guidance covers two extremes: buying a car outright, or leasing one and simply deducting payments. This site's lease-vs-buy comparison covers the upfront decision between those two paths, and the mileage-on-a-leased-car guide covers the lease-inclusion add-back while you're still leasing. Neither covers what happens at the seam between them: a freelancer who leased a car for business, then bought it at lease end. That transaction runs on the ordinary purchase-basis rules — which sounds simple, until you get to bonus depreciation, where the obvious reading of the statute is wrong.

Three Ways to End Up Owning a Vehicle You Used to Lease

This guide is about the first row only. If your lease had a bargain buyout, minimal payments relative to the car's value, or other hallmarks of a disguised sale, the lease-vs-buy guide's disguised-sale section applies instead — you've been on the purchase track the whole time and this transition doesn't exist for you.

The Basis Rule: What You Paid, Not What the Car Is Worth

IRC §1012(a) states the general rule plainly: "The basis of property shall be the cost of such property." A lease-end buyout is a purchase from an unrelated party — the leasing company — at whatever price your lease contract's option clause specifies. That price, not the vehicle's original MSRP and not any figure from the lease's amortization schedule, is your starting basis.

IRS Publication 551 lists what else gets capitalized into that basis: "Your cost also includes amounts you pay for the following items. Sales tax. Freight. Installation and testing. Excise taxes..." A sales tax paid at buyout gets added to the option price to arrive at your total cost basis — it does not get expensed separately or ignored.

This is the cleanest possible basis story in the vehicle-basis corpus. There's no donor's basis to track down (that's the gift rule under §1015), no date-of-death appraisal to obtain (that's the inheritance rule under §1014), and no lesser-of-cost-or-FMV comparison (that's the personal-property conversion rule). You paid a price; that price is your basis.

Why §179 Is Available Here — Unlike a Gift or Inheritance

This site's guide to gifted and inherited vehicles walks through why §179(d)(2)(C) permanently bars Section 179 on a vehicle whose basis is carried over from a donor or a decedent. A lease buyout fails none of that clause, because there's no carryover — your basis is a price you paid, full stop. The relevant text of §179(d)(2) instead asks three narrower questions:

"(A) the property is not acquired from a person whose relationship to the person acquiring it would result in the disallowance of losses under section 267 or 707(b)... (B) the property is not acquired by one component member of a controlled group from another component member of the same controlled group, and (C) the basis of the property in the hands of the person acquiring it is not determined... in whole or in part by reference to the adjusted basis of such property in the hands of the person from whom acquired, or... under section 1014(a)."

An ordinary leasing company — a bank, a captive finance arm, or a dealership's leasing subsidiary — is not a relative or a commonly-controlled entity under (A) or (B) for the overwhelming majority of freelancers, and your buyout price under (C) is your own new cost, not a number borrowed from the lessor's books. Section 179 is available on the resulting vehicle exactly as it would be on any other used-vehicle purchase, subject to the ordinary over-50%-business-use test and the §280F dollar caps below.

The Bonus Depreciation Question: Does Driving It as a Lessee Count as "Prior Use"?

This is the part that trips people up, including a first read of the statute itself. §168(k)(2)(A)(ii) makes bonus depreciation available for property whose "original use... begins with the taxpayer, or the acquisition of which by the taxpayer meets the requirements of clause (i) of subparagraph (E)." Clause (E)(i) states:

"An acquisition of property meets the requirements of this clause if— (I) such property was not used by the taxpayer at any time prior to such acquisition, and (II) the acquisition of such property meets the requirements of paragraphs (2)(A), (2)(B), (2)(C), and (3) of section 179(d)."

Read on its face, "not used by the taxpayer... prior to such acquisition" sounds like it disqualifies you outright — you drove this exact car, as the lessee, for the entire lease term. But that phrase has a specific regulatory definition, not its everyday meaning. Treas. Reg. §1.168(k)-2(b)(3)(iii)(B)(1) spells it out:

"Solely for purposes of paragraph (b)(3)(iii)(A)(1) of this section, the property is treated as used by the taxpayer or a predecessor at any time prior to acquisition by the taxpayer or predecessor if the taxpayer or the predecessor had a depreciable interest in the property at any time prior to such acquisition, whether or not the taxpayer or the predecessor claimed depreciation deductions for the property."

"Used by the taxpayer," for this specific test, means had a depreciable interest — not merely drove, possessed, or benefited from the vehicle. Under a genuine lease, the depreciable interest belongs to the lessor (the leasing company) for the entire lease term; the lessee holds a leasehold interest and deducts lease payments, never depreciation. You can drive a leased car for three years without ever holding a depreciable interest in it, because the tax law treats the leasing company as the owner throughout.

IRS Rev. Proc. 2026-15 confirms this is exactly the regulation preparers are meant to apply here. Its background section notes that the §168(k) bonus deduction doesn't apply if a taxpayer "acquired a used passenger automobile and the acquisition of such property did not meet the acquisition requirements in § 168(k)(2)(E) and § 1.168(k)-2(b)(3)(iii) of the Income Tax Regulations," and a footnote adds: "For a used passenger automobile acquired after January 19, 2025, the taxpayer applies rules consistent with the rules in § 1.168(k)-2(b)(3)(iii) to determine if the property meets the acquisition requirements in § 168(k)(2)(E)." That's the depreciable-interest test above, cited by the IRS's own current-year revenue procedure.

The result: a vehicle bought out of a genuine lease qualifies for 100% bonus depreciation on the same terms as any other used-vehicle purchase — the years you spent as a lessee don't count against you, because you never held the depreciable interest the test actually cares about. This wouldn't be true if your "lease" was actually a disguised sale (a conditional sales contract) — in that case you held the depreciable interest from day one, the analysis above doesn't apply, and you've simply been depreciating the vehicle already.

Worked Example: The Photographer's Lease Buyout

A freelance wedding photographer leased a sedan for 36 months under a genuine lease — a market-rate residual, no bargain buyout, no red flags under the conditional-sales-contract test. At lease end in August 2026, she exercises the purchase option at the price stated in her lease contract, buys the car outright from the (unrelated) leasing company, and continues using it 80% for client shoots and gear runs.

One date question worth settling upfront: the "acquisition" that starts the bonus-depreciation clock is the buyout itself — August 2026 — not the day she originally signed the lease three years earlier. Under §168(k) as amended by the One, Big, Beautiful Bill Act (Pub. L. 119-21, July 4, 2025), property acquired and placed in service after January 19, 2025 gets the full 100% additional first-year depreciation deduction, with no phase-down. Because the buyout transaction happens in 2026 — regardless of how old the underlying lease is — it qualifies for the full 100% rate.

node -e "
const fmt = n => n.toLocaleString('en-US', {minimumFractionDigits:2, maximumFractionDigits:2});

// Inputs
const buyoutPrice = 21000;      // arm's-length lease-end option price paid to the (unrelated) leasing company
const salesTaxRate = 0.06;      // illustrative state sales tax rate on the buyout
const salesTax = buyoutPrice * salesTaxRate;
const costBasis = buyoutPrice + salesTax;   // IRC Sec.1012 cost basis; sales tax capitalized per IRS Pub. 551
const bu = 0.80;                // business-use percentage from the mileage log

const depBasis = costBasis * bu;

// Rev. Proc. 2026-15 Table 1 (Sec.168(k) bonus depreciation applies) and Table 2 (no bonus), prorated by business-use %
const table1 = { y1: 20300, y2: 19800, y3: 11900, later: 7160 };
const table2 = { y1: 12300, y2: 19800, y3: 11900, later: 7160 };
const cap1_y1 = table1.y1 * bu;
const cap2_y1 = table2.y1 * bu;

// Route A: 100% bonus depreciation (OBBBA, property acquired after 1/19/2025, placed in service 2026)
const bonusTentative = depBasis; // 100% of depreciable basis
const bonusAllowed = Math.min(bonusTentative, cap1_y1);
const bonusExcessUnrecovered = bonusTentative - bonusAllowed;

// Route B: no bonus, straight MACRS, 5-year half-year convention
const macrs5 = [0.200, 0.320, 0.192, 0.1152, 0.1152, 0.0576];
const macrsY1Tentative = depBasis * macrs5[0];
const macrsY1Allowed = Math.min(macrsY1Tentative, cap2_y1);

console.log('Buyout price:', fmt(buyoutPrice));
console.log('Sales tax (6%):', fmt(salesTax));
console.log('Total cost basis (Sec.1012 + Pub.551 sales tax add-on):', fmt(costBasis));
console.log('Depreciable basis (cost basis x 80% business use):', fmt(depBasis));
console.log();
console.log('--- Route A: 100% bonus depreciation ---');
console.log('Tentative bonus deduction (100% of dep. basis):', fmt(bonusTentative));
console.log('Sec.280F Table 1 cap, year 1 (20,300 x 80%):', fmt(cap1_y1));
console.log('Allowed year-1 deduction (capped):', fmt(bonusAllowed));
console.log('Unrecovered basis carried to 1st year after recovery period (Sec.280F(a)(1)(B)):', fmt(bonusExcessUnrecovered));
console.log();
console.log('--- Route B: no bonus, straight MACRS ---');
console.log('Tentative year-1 MACRS deduction (20.0% x dep. basis):', fmt(macrsY1Tentative));
console.log('Sec.280F Table 2 cap, year 1 (12,300 x 80%):', fmt(cap2_y1));
console.log('Allowed year-1 deduction (capped?', macrsY1Tentative > cap2_y1, '):', fmt(macrsY1Allowed));
console.log();
console.log('Difference between routes A and B in year 1:', fmt(bonusAllowed - macrsY1Allowed));
"

Output:

Buyout price: 21,000.00
Sales tax (6%): 1,260.00
Total cost basis (Sec.1012 + Pub.551 sales tax add-on): 22,260.00
Depreciable basis (cost basis x 80% business use): 17,808.00

--- Route A: 100% bonus depreciation ---
Tentative bonus deduction (100% of dep. basis): 17,808.00
Sec.280F Table 1 cap, year 1 (20,300 x 80%): 16,240.00
Allowed year-1 deduction (capped): 16,240.00
Unrecovered basis carried to 1st year after recovery period (Sec.280F(a)(1)(B)): 1,568.00

--- Route B: no bonus, straight MACRS ---
Tentative year-1 MACRS deduction (20.0% x dep. basis): 3,561.60
Sec.280F Table 2 cap, year 1 (12,300 x 80%): 9,840.00
Allowed year-1 deduction (capped? false ): 3,561.60

Difference between routes A and B in year 1: 12,678.40

Taking bonus depreciation is still dramatically better here — $12,678.40 more in year one — even though the §280F cap bites. The $1,568.00 the cap disallowed isn't lost. Under §280F(a)(1)(B), "the unrecovered basis of any passenger automobile shall be treated as an expense for the 1st taxable year after the recovery period," subject to that year's own "each succeeding year" limit ($7,160 × 80% = $5,728.00 for 2026-placed-in-service vehicles — more than enough to absorb $1,568.00 in one year). A 5-year-property vehicle depreciated under the half-year convention spans six tax years, not five — 2026 through 2031 for a vehicle placed in service in 2026 — so the first taxable year succeeding the recovery period is 2032, not 2031. Rev. Proc. 2019-13, §4.04, Example 1 confirms this counting directly: a passenger automobile placed in service in 2018 has its unrecovered basis "recovered by the taxpayer beginning in 2024" — six years later, not five.

That five-year wait for a single lump-sum deduction is exactly what the IRS calls, in its own words, an "anomalous result." Rev. Proc. 2019-13 §4 offers a safe-harbor method of accounting that spreads it out instead: for each of the intervening years (2027–2031 here), you deduct the depreciation table's rate for that year applied to the remaining adjusted depreciable basis — not the original $17,808 — capped each year by that year's own §280F limit. Recomputing Route A's 2027–2031 deductions this way: $501.76 (2027, 32.0% of the $1,568.00 remaining basis), $301.06 (2028, 19.2%), $180.63 (2029 and 2030 each, 11.52%), and $90.32 (2031, 5.76%) — $1,254.40 recovered across those five years, leaving just $313.60 to be swept into 2032 instead of the full $1,568.00. The safe harbor is available here because this vehicle wasn't leased when placed in service and no §179 was claimed on it (Rev. Proc. 2019-13 §3.01) — it has to be adopted by using it on the return for the first taxable year after the placed-in-service year, and it isn't the default; without electing into it, the $1,568.00 stays deferred in full to 2032.

The §280F Cap Applies in Full — Even for an August Buyout

A common assumption: "I only owned this car for five months this year, so my depreciation cap should be five-twelfths of the annual limit." IRS Publication 463 says otherwise: "Car used less than full year. The depreciation limits aren't reduced if you use a car for less than a full year. This means that you don't reduce the limit when you either place a car in service or dispose of a car during the year." The full first-year Table 1 or Table 2 amount applies to a car bought out in January exactly as it does to one bought out in December — the only proration in play is for business-use percentage, not for months of ownership.

One caveat the corpus already covers elsewhere and this guide won't re-derive: if a large share of your total asset additions for the year lands in the fourth quarter, the mid-quarter convention can replace the half-year convention used in the worked example above, changing the MACRS percentages (though not the §280F dollar caps themselves). Check with a preparer if this vehicle is one of several assets placed in service late in the year.

What Happens to Your Standard-Mileage Election From the Lease Period?

If you used the standard mileage rate while leasing this car, Rev. Proc. 2019-46 §4.05(2) required you to keep using it "for the entire lease period" — a multi-year lock-in made the first year you leased it. That rule, on its own text, governs "an automobile a taxpayer leases." Once you exercise the buyout, the car is no longer leased; it's owned. The general first-year rule under §4.01 of the same revenue procedure — a taxpayer "may use the business standard mileage rate... for an automobile that a taxpayer either owns or leases" — then applies to this vehicle as a newly-owned asset, and nothing in the lease-period lock-in language extends forward into ownership.

Practically: you get a fresh choice at the buyout date between standard mileage and actual expenses (including §179 and bonus, as covered above), independent of whichever method you used during the lease. No IRS ruling addresses this specific transition by name, so this is the reasoned application of the lock-in rule's own scope rather than an explicit pronouncement — keep clean, separately-dated logs bracketing the lease period and the ownership period so the transition date isn't in dispute later. For 2026 itself, remember the mid-year rate split if you do elect standard mileage post-buyout: $0.725/mile January 1–June 30, $0.76/mile from July 1.

Records You Need

• The lease contract's buyout/purchase-option clause, showing the option price was set in advance and reflects a market-rate residual (not a nominal or bargain figure)
• The buyout transaction documents — bill of sale, sales tax receipt, and payment record — dated on the exercise date, which anchors your placed-in-service date for the newly-owned vehicle
• Your business-mileage log split at the buyout date, so the lease-period log (irrelevant to basis, relevant only to the standard-mileage lock-in question above) and the ownership-period log (which sets your business-use percentage for depreciation) are never conflated
• Confirmation the leasing company is unrelated to you under §267/§707(b) — routine for a bank or captive finance company, but worth a note if you leased from a relative's business

Audit Triggers & Common Mistakes

1. Using the car's original MSRP or the lease's cap cost as basis instead of what you actually paid to buy it out. Your basis is the buyout price plus capitalizable costs — nothing else.
2. Assuming years as a lessee automatically disqualify the vehicle from bonus depreciation. They don't, for a genuine lease — Treas. Reg. §1.168(k)-2(b)(3)(iii)(B)(1)'s depreciable-interest test is what actually governs, not simple prior possession or use.
3. Prorating the §280F dollar cap for a mid-year buyout. Publication 463 is explicit that the annual limit isn't reduced for a partial year in service — only for business-use percentage below 100%.
4. Treating a disguised-sale lease (nominal or bargain buyout) the same as a genuine lease bought out at fair value. If your contract had those features from the start, you've already been depreciating this vehicle — this guide's fresh-basis analysis doesn't apply.
5. Carrying the lease-period standard-mileage lock-in forward into the ownership period as if it still binds you. The rule's own text is scoped to a leased automobile; once you own it, the general first-year election rule applies again.
6. Forgetting that a disallowed §280F excess isn't gone. It resurfaces as a deduction in the first tax year after the vehicle's regular recovery period ends — track it so it isn't missed years later.

How CentSense Helps

CentSense keeps the two records this mechanic depends on — buyout paperwork and a clean mileage-log split — attached to the right vehicle instead of scattered across lease-company portals and glove-box receipts:

• Buyout price, sales tax, and bill-of-sale documents scanned and attached to the vehicle's record on the exercise date
• A mileage log that splits automatically at any date you specify, so the lease-period log and the post-buyout ownership log never get conflated when you or your preparer need to check the standard-mileage lock-in question
• Business-use percentage tracked from logged trips, the exact multiplier the depreciable-basis and §280F-cap math above both depend on
• A CPA-ready export at tax time with the buyout date, price, and business-use history already organized

For the related basis mechanics this guide deliberately doesn't cover, see gifted and inherited vehicle basis, trading in a business vehicle, and the lease-vs-buy decision itself.

Start a free CentSense account — the free tier includes 10 AI scans a month, no credit card required.

Authoritative References

• 26 U.S.C. §1012 — Basis of property; cost (Cornell Law School Legal Information Institute)
• 26 U.S.C. §179 — Election to expense certain depreciable business assets (Cornell Law School Legal Information Institute)
• 26 U.S.C. §168 — Accelerated cost recovery system (Cornell Law School Legal Information Institute)
• 26 U.S.C. §280F — Limitation on depreciation for luxury automobiles (Cornell Law School Legal Information Institute)
• 26 CFR §1.168(k)-2 — Additional first year depreciation deduction (Cornell Law School Legal Information Institute)
• IRS Rev. Proc. 2026-15 — 2026 passenger-automobile depreciation limitations
• IRS Rev. Proc. 2019-46 — Standard mileage rates and substantiation
• IRS Publication 463 — Travel, Gift, and Car Expenses
• IRS Publication 551 — Basis of Assets

This guide is general education for U.S. self-employed freelancers filing a Schedule C in 2026. Whether your specific lease is genuine or a disguised sale, your business-use percentage, and how much of the §280F cap binds in your case all depend on your actual contract and records. Consult a CPA or EA before relying on any computation here for a specific vehicle.