Why Equipment Leasing Can Be A Huge Tax Benefit

By Laura Halap| Aug 29, 2016| 2433 Views
3 MIN
Why Equipment Leasing Can Be A Huge Tax Benefit

Equipment leasing is better than equipment buying in so many ways.

Unlike when you buy, when you lease, you can keep your credit line open and strengthen your cash flow during the lease period.

But that’s just a scratch on the surface. The main benefit usually comes in during tax time. In the U.S., business owners who lease equipment get preferential treatment allowing them to compound their annual returns through deductions, property swaps, and lower tax rates.

Below are some of the huge tax benefits of leasing.

Deductions

Deductions allow the business owner to deduct from their gross income all expenses associated with the leased property. And it’s not just at the federal level.

The government also allows you to deduct all state and local property taxes related to the leased property. You can also take deductions for labor and services required to maintain the property. If there was a liability claim where the leased property was involved, you could also take a deduction for the cost of managing that claim.

Depreciation

People who lease or buy equipment are allowed to take a deduction for the depreciation of the equipment. However, compared to straight purchases, the tax deductions for leased equipment are often higher.

Here's why. Depreciation rates vary based on the type of asset, business use, and the time of purchase. When you buy an asset, tax deductions usually vary from year to year.

Moreover, there are usually restrictions in allowable depreciation for the first year of purchase. This can result in a very low tax deduction in the year in which the asset was purchased.

However, when you lease the equipment, the deductions for depreciation remain constant all through the leasing period. So, even in the first year, the deduction for depreciation will be relatively high.

Gains

In the U.S., the government taxes ordinary income at rates as high as 35 percent. However, profits from the appreciation of leased equipment that a business sells are considered capital gains.

In the U.S., the government taxes ordinary income at rates as high as 35 percent.

If you hold onto the leased property for a year or longer and thereafter sell it for a profit, you will only owe 15 percent tax on the gains.

Section 179 - Expensing limit

Following the passing of the PATH Act and hence the increase of the Section 179 expense limit, businesses will now breathe freely when it comes to leasing equipment. The limit increased from $25,000 for the 2015 fiscal year all the way up to $500,000.

What this means for businesses, is that they can deduct the full amount of qualifying equipment up to $500,000 from their gross income. Businesses that spend more than $2 million - but less than $2.5 million – in a fiscal year on qualifying equipment will get a dollar-for-dollar phase out cap.

With these added benefits especially when it comes to leasing equipment, businesses can comfortably lease the equipment they need when they need it, without worrying about Congress raising the expense limit.

In Summary

Leasing is not just an option when you can’t afford to buy. Tax-wise, it is a much better option than buying.

Laura Halap

Laura Halap

P: 847-849-5639 |  EContact Me

Laura Halap is a Controller at Beacon Funding Corp. Laura has over 35 years working in the equipment leasing industry providing professional services across a broad range of finance and accounting areas.