The Tax Benefits of Equipment Leasing
When you own a business, how well you control your cash flow can mean the difference between having a successful year and declaring bankruptcy. One way that your business can acquire new equipment without going into large amounts of debt is by equipment financing. By obtaining your equipment this way, you lease the equipment rather than buying it outright. Since your lease payments would be lower than the total cost of the equipment, the impact on your cash flow is less than it would be if your company purchased the equipment. Plus, depending on the type of lease you obtain, several tax benefits come along with equipment leasing.
A true lease is an IRS term, and it’s the same type of lease that accountants refer to as a fair market value lease. Under a true lease, your company is not seen by the IRS as the owner of the equipment. Due to this, your business cannot claim any owner tax benefits from the equipment, such as tax credits or depreciation, but you can deduct the lease payments as an operating expense. This ability can be a substantial benefit to your business if your lease extends more than the five years of depreciation allowed for owned assets.
The IRS treats a non-tax lease the same as if your company purchased the equipment outright, which means that you can claim all the tax benefits of owning the equipment without actually purchasing it. The advantages of this type of equipment financing include depreciation of the equipment value over five years and interest expense deductions. With this kind of lease, your company can take advantage of Section 179 of the tax code, which allows you to depreciate the equipment’s cost as an expense instead of having to capitalize it and then depreciate it. As an expense, your business reaps the entire tax benefit in the year of its purchase, as opposed to capitalization, which spreads out the depreciation over five years. What your company can’t claim as an expense is any lease payments your company makes on the equipment.
The type of lease you use for equipment financing depends on the needs of your business and the tax benefits you seek to obtain for your company. When considering leasing equipment, it’s important to remember that the IRS has strict rules about what constitutes the difference between the two types of leases. You can save your business money at tax time by making sure you understand the tax implications of any lease before your company agrees to it.