Equipment Financing Tax Benefit Guide – Operating Lease vs. Financing Lease | Alta Commercial Capital
If you are a business owner, then you probably know that there are a lot of different ways to finance your business. Two popular methods are Operating Leasing and Financing Lease. Both of these methods have their own set of pros and cons, but they also both come with their own set of tax benefits.
In this blog post, we will break down the different tax benefits of operating leasing and financing lease so that you can make the best educated decision for your business.
Operating Lease Tax Benefits
Operating leases are typically shorter in term than financing leases, which means that they offer more flexibility to businesses. This type of lease also offers some great tax benefits, including the ability to deduct lease payments as an expense on your income taxes.
Five Tax Benefits for Operating Leasing
1. You can deduct your lease payments as a business expense on your taxes, which can help reduce your overall tax bill.
2. Since operating leases are not recorded on your balance sheet, they can help you keep your debt-to-asset ratio low. This is important for financial reporting purposes and can make your business look more financially stable to potential investors.
3. Operating leases offer more flexibility than financing leases, which can be important for businesses that are growing or have fluctuating needs.
4. You may be able to negotiate a lower interest rate on an operating lease than you would on a loan for a similar amount of money.
5. If you lease equipment that becomes obsolete quickly, you can simply return it at the end of the lease term and lease something new, rather than being stuck with outdated equipment.
Financing Lease Tax Benefits
Although financing leases tend to be longer in term than operating leases, they offer some great tax benefits as well. For starters, you can deduct the interest paid on a financing lease as an expense on your income taxes. Additionally, since financing leases do show up on your balance sheet, they can help you improve your debt-to-asset ratio—which is again beneficial for financial reporting purposes.
Five Tax Benefits for Financing Leasing
When it comes to business tax benefits, there are also plenty of reasons to opt for a financing lease over an operating lease. Here are five key tax advantages:
1. You Can Deduct the Interest Paid as an Expense the interest paid on a financing lease is fully deductible as an expense on your company’s income taxes. This can result in some significant tax savings, particularly if you have a high interest rate.
2. It Can Help Improve Your Debt-to-Asset Ratio Since financing leases do appear on your balance sheet, they can help improve your debt-to-asset ratio—which is beneficial for financial reporting purposes. A lower debt-to-asset ratio may also make it easier to secure additional financing down the road.
3. You Can Deduct the Depreciation of the Asset You can also deduct the depreciation of the leased asset as an expense on your taxes. This can be a significant tax benefit, particularly over the long term.
4. It Offers Flexibility in Terms of Payment There is often more flexibility with financing leases in terms of how and when you make payments. This can be helpful if you have fluctuating cash flow or are trying to conserve working capital.
5. You May Be Able to Claim a Tax Credit Depending on the type of equipment you lease, you may be able to claim a tax credit—such as the federal research and development tax credit. key takeaway: The interest paid on a financing lease is fully deductible as an expense on your company’s income taxes.
A lower debt-to-asset ratio may also make it easier to secure additional financing down the road. You can also deduct the depreciation of the leased asset as an expense on your taxes. Financing leases often offer more flexibility in terms of payment than operating leases.
You may be able to claim a tax credit for certain types of equipment leased under a financing agreement. selecting the Right Type of Lease The type of lease you choose will depend on a number of factors, including the amount of money you have available for a down payment, your company’s financial needs and objectives, and your desired level of control over the leased asset. If you’re looking for maximum tax benefits, a financing lease may be the right choice for your business. Just be sure to weigh all the pros and cons before making a decision.
Both operating leasing and financing lease offer fantastic tax benefits to business owners. So, which one is right for your business? The answer depends on a variety of factors, including your business’s needs and goals. But the first step is to contact professionals that work with financing equipment.
Alta Commercial Capital with their sophisticated book of equipment financing options can help.
Call or email us today.
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