Equipment Leasing Solutions

Equipment Leasing Tax Deductions

One of the greatest advantages equipment leasing holds over equipment loans or paying cash is the tax deductibility of equipment leases. Various leasing options offer different tax benefits, and Trident Leasing Corporation believes strongly in finding a plan that works best for you. The first thing to recognize is that there are two basic leasing options recognized by the lessor and lessee:

Operating Equipment Lease: An operating lease recognizes the equipment primarily as being rented, keeping equipment ownership off of the lessee’s balance sheets and focusing on the expense of lease payments for tax deductions. An operating lease works as a “True Lease.”

Capital Equipment Lease: A capital lease assumes you will take advantage of a buyout option and treats the lease more as a purchase, placing the equipment on your balance sheet and thus focusing on the depreciation of the equipment for deductions in your taxes.

These two lease methods are equivalents of the IRS recognized categories of leasing, the tax-oriented true lease and non tax-oriented leases. Understanding how the IRS is going to view your equipment lease agreement is crucial to opting for the proper form of tax deduction. Following is a summary of the details of these two lease categories:

Tax-Oriented True Equipment Lease: With a true lease, the lessor retains ownership of the equipment. As the agreement with the lessee is recognized as a rental, the equipment stays off of the lessee’s balance sheets and the lessee is able to deduct the entire lease payment. Lease payments are always fixed and cost the same each year, making budgeting easier. The lessee generally has a fair market value purchase option at the end of the equipment lease.

Non-Tax Oriented Equipment Lease: The lessor is the legal owner of equipment in every lease agreement, but with a non-tax oriented lease the equipment appears on the balance sheets of the lessee. This allows the lessee to make tax deductions on the depreciation of the equipment during the lease term. This option operates based on an understanding that the lessee will take advantage of their purchase option at the end of the lease term.

It is important to pay attention to the type of equipment you are looking to acquire in order to decide which option is best for you. In every lease transaction, it is also important that you consider the benefits of expensing the equipment itself. Internal Revenue Code Section 179 allows a deduction on tangible property for your business in the year it is purchased.

The Section 179 deduction does not occur automatically, so remember to select this deduction when filing taxes in any year you bought equipment. The amount of allowed deduction under Section 179 has been increasing annually, so take this into consideration when choosing whether or not to implement a purchase option at the end of a lease agreement; also, do not forget to deduct your lease payments or equipment depreciation when filing taxes with an equipment lease.