Tax Benefits of Leasing Equipment in 2023

By leasing equipment this year, your business may be eligible to take advantage of tax benefits.

By Asher Zallik| Jan 18, 2023| 108 Views
4 MIN
Tax Benefits of Leasing Equipment in 2023

Many business owners aren’t aware you don’t have to purchase equipment outright with cash to save on your income taxes. If you acquire equipment this year using a loan, lease, or finance agreement, you may be eligible for a potential tax benefit.

Nearly 80% of U.S. companies lease some or all of their equipment. That's because leasing allows them to compound their annual returns through deductions, property swaps, and lower tax rates. By leasing equipment, your business may be eligible to take advantage of these benefits.

Be sure to consult a tax professional before leasing equipment

Remember: Be sure to consult your CPA or tax advisor to discuss whether your equipment is eligible for tax savings.

If you are considering leasing equipment this year, keep reading to learn more about its potential benefits, key differences between lease structures, and how you utilize a FREE tax savings calculator.

In this article…

  1. Can You Write Off Equipment Lease Expenses?
  2. Differences Between Captial and Operating Leases
  3. How Much Can You Save on Your 2023 Income Taxes?
  4. Recap of Potential Tax Benefits for Leasing Equipment
  5. Considering Leasing Your Next Equipment Purchase?

Can You Write Off Equipment Lease Expenses?

Business owners are allowed to deduct lease payments on their taxes. The way your lease is structured can impact tax benefits available to you.

There are two ways you can set up your leased equipment: Capital Lease and Operating Lease. Learn about each structure, key differences, and how they can affect your tax benefits.

Differences Between Capital and Operating Leases

Capital Lease

A capital lease is a contract that coveys a purchase of an asset. For accounting purposes, a capital lease is treated as if it were actually owned by the lessee and is recorded on the balance sheet as such.

This is important because to use deprecation as a deduction, the IRS required you to own the property. Luckily if you have a capital lease like an EFA (Equipment Financing Agreements) or a $1 buy-out option, you can claim depreciation over the useful life of the asset.

Pro tip: If you have a capital lease, talk to your tax advisor about accelerating your tax deduction with Section 179. Write-off 100% of the purchase price the tax year you acquire.

Closeup of business owner penciling in their tax benefits on paper after using a blue handheld calculator on their wooden desk.

Operating Lease

An operating lease is a contract that allows for use of an asset without transferring ownership. This type of lease is usually written with either a fair market value purchase option or a fixed purchase option, such as 10% of the equipment cost.

Since the lessor still maintains ownership of the equipment, businesses can’t claim depreciation. However, because an operating lease generally counts as a rental expense, it still qualifies for tax incentives! Business owners may be able to write-off their lease payments.

Pro tip: Operating leases are considered “true tax leases.” Talk to your tax advisor about how much you can save with a write-off for your lease payments.

Overview of a business owner wearing glasses reads their operating lease on paper as a desktop computer sits on their work desk.

How Much Can You Save On Your 2023 Income Taxes?

See a breakdown of your potential tax savings of two different $50,000 equipment purchase scenarios.

Type of Agreement

Operating Lease

Capital Lease

Tax Write-Off

Deduct Lease Payments: Monthly payments may be deductible during the life of the lease.

Section 179 Depreciation: 100% of the equipment may be deductible in the tax year it's acquired. Expense up to $1,160,000 of equipment acquired in 2023.

Tax Savings Example

 

 

Lease Structure

$50,000 worth of equipment on a 36-month lease with FMV 10% purchase option.

$50,000 worth of equipment on a 36-month lease with $1 buyout.

Monthly Payment

$1,480/month

$1,620/month

Projected 2023 Tax Savings
(Assuming 35% Tax Bracket)

$6,216

([$1,480 x 12 months] x 35 percent)

$17,500

($50,000 x 35 percent)

Projected 2024 Tax Savings
(Assuming 35% Tax Bracket)

$6,216

([$1,480 x 12 months] x 35 percent)

$0

Projected 2025 Tax Savings
(Assuming 35% Tax Bracket)

$6,216

([$1,480 x 12 months] x 35 percent)

$0

Projected Total Tax Savings

$18,648

$17,500

*All examples provided herein are for illustrative purposes only. Actual numbers will vary based on tax brackets, lease payment amount, and individual financial situations.

Calculate Your Capital Lease's Potential Section 179 Tax Savings

With Section 179 you can receive a huge tax benefit just for financing qualified equipment before the year ends. See how much you could save by using our Section 179 tax savings calculator.

Recap of Potential Tax Benefits for Leasing Equipment

  • True Tax Lease: Monthly payments may be deductible during the life of the lease.
  • Section 179 (EFAs/$1 Buyout): 100% of the equipment may be deductible in the year it is acquired and used.
  • Choose to accelerate your tax benefits according to your business needs.

Considering Leasing Your Next Equipment Purchase?

If you acquire equipment this year, remember to discuss your write-off options with your certified public accountant (CPA) or tax advisor. We can’t provide specific tax information for your business. Please contact a tax professional for more information.

To learn more about the benefits of leasing equipment and tax savings available to you, visit beaconfunding.com/equipment-financing/how-it-works/section-179-tax-deduction.

Asher Zallik

Asher Zallik

P: 847.307.6238 |  E: Schedule a Meeting with Me

Graduating with a bachelor’s degree from the University of Illinois at Urbana-Champaign, Asher Zallik is the financing consultant you will wish you knew when you started your business.



01/18/2023