One of the first things I hear business owners say about equipment leasing is that they are going to be able to write their payments off and get a tax break from doing so.
While this may be true, its not always going to work like that for a number of different reasons.
First of all, only an operating lease that is properly structured can allow you to write off all lease payments as an operating expense.
An operating lease has a number of different rules, which can vary by tax jurisdiction, but for the most part, require the lease obligation to have at least 10% of the original asset value be outstanding at the end of the lease along with the lessee having an option at most to acquire the asset at the end of the lease.
This is in contrast to a capital lease where the lessee is obligated to purchase the asset from the leasing company at the end of the lease term for a predetermined nominal amount in most cases.
If a lease qualifies as an operating lease, the payments can be classified as an operating expense and a write off against earned income in most tax jurisdictions (check with your own accountant or tax adviser).
But what does that really gain you?
If you have a capital lease, you basically fall under the same guidelines as owned equipment, which can be financed by some combination of cash and third party debt.
With a capital lease, you depreciate the asset and write off the cost of financing, if there is any, just like you do with an equipment loan.
Therefore, an operating lease does not give you a greater write off so to speak, but it can potentially allow you to write off the allowable tax expenditures faster.
For instance, one of the situations where an operating lease can have a nice fit is in the financing of grain bins.
A grain bin is going to be depreciated over 10 to 20 years as it has a long potential useful life. So the capital cost of the asset is going to be applied against earnings over a long period of time, minimizing the tax write down that is available in any one year.
But if the grain bin (or granary if you want to be really accurate) is financed via operating lease with say a three year term, 90% of the capital cost and 100% of the business financing cost can be written off in three years instead of ten or more years.
The other key element for getting an immediate tax advantage from an operating lease is you have to be taxable with a higher marginal tax rate being more beneficial than a lower tax rate.
Bottom line, there can be tax advantages to equipment leasing, but you better go see your accountant first and crunch the numbers as there is automatic benefit to leasing and the lease payments are not automatic write offs either.