Who doesn’t want tax savings in our current economic condition? As a business owner who needs equipment fast and easily, you have two options: equipment financing and leasing.
Both options offer distinct tax advantages. That’s why it’s necessary to understand the basic differences between them to make a better choice. Every business needs different equipment, such as tow trucks, septic trucks, skid steers for landscaping, mini-excavators, landscaping trucks, screen printing or embroidery machines. With tax savings, it can either save you thousands of dollars or make you lose your hard-earned money.
In this article…
- What is Equipment Financing?
- What is Equipment Leasing?
- Tax Advantages of Capital and Operational Lease
- Why Choose Beacon Funding for Financing or Equipment Leasing?
What is Equipment Financing?
Equipment financing is a fast and easy way to acquire heavy equipment for your business. Your business can break down the high purchasing cost into low monthly payments. You maintain ownership during and after your term.
What is Equipment Leasing?
Equipment leasing allows a business to use equipment for a certain period with options to buy it at the end. Beacon Funding’s Lease-to-Own program offers the lowest monthly payment options without options as low as $1.
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Leasing equipment can be done in two ways – capital lease and operational lease.
Difference Between Capital Lease and Operational Lease
There are several differences between capital and operational leases. Let’s uncover these differences to better understand the tax advantages of both:
- Capital Lease: Also known as an equipment finance agreement. It is treated as a purchase for accounting purposes. By the end of the lease, the business has ownership rights over the equipment. A capital lease is considered an equipment purchase rather than a rental when it comes to tax. Due to this, the lessee can deduct both depreciation and interest expenses for taxes.
- Operational Lease: Allows business owners to use an asset without assuming ownership of the asset. The lessor maintains ownership and is responsible for maintenance and repairs. By the end of the lease, business owners have the option to buy the equipment for as low as $1 or 10% of the original purchase price of equipment. Because there are no ownership rights during the lease term, businesses can only deduct the lease payment as expenses from taxes.
Be sure to consult a tax professional before leasing equipment
Important: It’s essential to work with a CPA or tax advisor to navigate the complexities of tax laws and ensure you are optimizing your deductions. Please consult your tax advisor to determine the tax ramifications of acquiring equipment or software for your business.
Tax Advantages of Capital and Operational Lease
Both types of leases have their own advantages that can benefit different kinds of businesses.
Tax Advantages of Capital Lease
There are various tax benefits of capital leases. Since the asset is recorded on the lessee’s balance sheet, you can claim depreciation over the asset’s useful life. This way, businesses can reduce their taxable income.
Section 179 allows you to write off the entire purchase price in the same tax year, rather than spreading it over several years. This way, businesses can save thousands of dollars in the early years of the lease. Since capital lease leads to ownership, this method of tax savings can be used for the long term, and businesses can benefit from the value appreciation of the equipment as well.
A capital lease offers several tax benefits that can be advantageous for businesses:
1. Depreciation Deductions
Ownership Benefits: Since a capital lease is treated as ownership, the lessee can claim depreciation on the leased asset. This reduces taxable income.
2. Interest Expense Deduction
Interest Payments: The interest portion of the payments can be deducted as an expense on the income statement, lowering taxable income.
3. Lower Overall Tax Liability
Combined Deductions: By combining depreciation and interest expense deductions, businesses can significantly reduce their overall tax liability.
Tax Advantages of Operational Lease
An operating lease allows you to use an asset without assuming ownership. The lessor maintains ownership and is responsible for maintenance and repairs.
While you can’t claim depreciation on an operating lease, the lease payments themselves are considered a rental expense and are fully deductible. This makes operating leases an attractive option for businesses looking to avoid large upfront costs while still benefiting from tax deductions. This is a great option, especially for small businesses to stay flexible, with no ownership responsibilities, simple account management, and no need to track asset depreciation.
Moreover, an operational lease is considered off-balance-sheet financing, which means it is not considered a liability, which makes it easier for businesses to apply for further loans or to impress investors. This is because it improves financial ratios, such as return on assets and debt-to-equity ratios.
This type of lease is especially good for small businesses and those who are aiming for expansion by attracting new investors.
Which is Better for Your Business?
Choosing between equipment financing and a lease depends on your business needs. There are several factors you must consider, such as cash flow, long-term goals, business requirements, and much more.
Also consider the sales tax situation in your state. Be sure to consult with your tax advisor to see which tax options are available in your location.
Why Choose Beacon Funding for Financing or Equipment Leasing?
When choosing the lender for equipment financing or leasing, having a trusted and reliable lender makes all the difference.
Choosing the right lender can make a huge difference and save you a significant amount of money. If you are looking for a reliable equipment financing solution, Beacon Funding is your best choice. We offer tailored solutions to support businesses of all scales. Apply now to own the equipment your business needs and set your business on the path of growth.
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If you have any further questions, contact us right away for prompt responses!