To Lease or Not to Lease – and What Type of Lease?
Unless your business has so much capital available that you don’t know what to do with it (pretty rare especially with economic conditions in recent years), cash flow is a concern when the need arises to acquire new or used equipment. This may be in the form of heavy equipment, semi-trucks or commercial vehicles, and even high-dollar off-the-shelf computer software or computer equipment.
To retain available capital for other important purposes, including growing the business, it can often be to your advantage to obtain equipment leasing on such equipment rather than purchasing it outright. This leaves your capital on the balance sheet and can improve your financial statements for investors or other analysts evaluating your financial well-being.
The primary equipment leasing alternatives are capital leases and operating leases. It’s important to understand not only the differences between these types of leases, but also the tax implications attributable to each. Accounting regulations are generally mandated by the Federal Accounting Standards Advisory Board (FASAB) and leases must meet specific criteria when being classified as capital or operating leases.
Tax Implications of Capital Equipment Leasing vs. Operating Equipment Leasing
Capital leased equipment becomes a company asset on your general ledger, and as such, is subject to such additional expenses as depreciation and taxes. Operating leases, on the other hand, are purely an expense on your balance sheet, with the advantage of writing off the expense in actual dollars against earned income.
Depending on the anticipated life of the asset (defined by IRS guidelines for each asset type) an operating lease may result in better financial results for a particular lease term.
Lessees in a capital lease take ownership of the equipment along with the associated tax liability and interest expense. Capital lease payments are also reflected on your ledger as liabilities. Operating leases are considered as rental of equipment with no impact on tax liabilities or financial impact on your balance sheet as debt. Operating leases also incur no risk from property ownership since, by definition, the lessee only leases the use of the equipment, while the lessor retains that ownership.
Getting Your Equipment Leasing Options Right the First Time
Understanding the basics of operating equipment leasing vs. capital equipment leasing and their tax differences is a head start toward making the best financing choices for your business.
Equipment Finance Services is a leader in the equipment finance industry, and can tailor lease options to suit your specific needs. With our experience and funding partnerships, we can provide guidance and financing flexibility that ensures you make the leasing choices that give your business the opportunity to improve cash flow while acquiring the equipment you need to grow your company. Contact us today to discover how Equipment Finance Services can help you navigate the financing options best for your business.