While capital leases and their tax advantages are in the spotlight due to changes in the Section 179 deductions for 2018, operating leases may still offer tax benefits depending on the type of asset leased. Under an operating lease, the lessor maintains ownership of the asset and the associated deductions, while the lessee deducts lease payments as an operating expense and records those payments on the Profit & Loss statement as they’re paid or incurred.
The ability to deduct payments on an operating lease as an operating expense is one of the most popular tax advantages of this lease type. However, an operating lease’s tax advantages depends on the type of asset you lease.
You might see a greater tax break from the direct expense of each lease payment if the equipment (asset) you’re leasing is anticipated to become obsolete before the entire value can be depreciated off your books. Internal Revenue Service (IRS) regulations determine the amount of depreciation that can be expensed, and the IRS dictates the lifespan of the equipment under normal use.
Another advantage is that you can offset operating expenses dollar for dollar against income earned, reducing your net profit, and thus, your tax obligation.
Whether your equipment lease is classified as a capital or an operating lease has significant implications. Your business’s tax situation is unique to you and your company, so you must determine what classification is most beneficial for your business. The most common distinction being that capital leases allow you now to deduct the full purchase price of equipment in the year it was put in use, while operating leases allow you to deduct lease payments as operating expenses for the term of the lease, reducing your taxable income.
As with all business transactions, a trusted professional can help you determine which type of lease will provide you with the maximum tax advantages based on your goals and financial situation. Global Financial & Leasing Services (GFLS) has been providing financial resources to help small and mid-sized companies gain the equipment they need to grow since 2009. Our team is known for looking beyond credit scores and history to find financing that works for you. Have a question about equipment financing? Contact us.