Tax Benefits

Under so-called “tax leases,” the lessor owns the equipment for tax-reporting purposes. “In a tax lease, the lessee is ‘trading’ the tax benefits of equipment ownership with the lessor for favorable payments and more flexible tax management,” noted Deborah Borow in Business First of Buffalo. “Depending on the lessee’s specific tax situation, this lease feature can significantly lower the total cost of equipment.”

Synthetic leases, meanwhile, are structured as a loan for tax purposes but as a lease for accounting purposes. “It allows corporations to acquire assets that are financed off the balance sheet while retaining the tax benefits of ownership,” said Borow.

Lease your equipment today with Beacon Leasing.

Avoiding the “Double Tax Whammy”

Under the Tax Reform Act of 1986 Congress took aim at small to medium sized businesses that had been reducing their overall tax liability by claiming depreciation on equipment they had acquired.  Although the subject is rather complex, the net effect is that companies who have used equipment depreciation to significantly lower their tax liability are subject to a review that may have the effect of classifying some of those depreciation write-offs as “tax preferences” and subjecting those same companies to an additional “Alternative Minimum Tax,” in addition to the taxes they would otherwise owe.  Owning or purchasing too much equipment, while lowering the traditional tax component, can now trigger the addition of new added taxes.  The good news: equipment lease payments that are treated as rentals (real FMV) do not qualify as tax preference items and have no adverse effect on AMT liability.

Lower Your Tax Liability

With a cash, bank loan or finance type lease purchase you normally recapture some of your cash expenses by claiming depreciation on the equipment according to the IRS accepted “useful life” of that equipment.  You may also claim the interest portion as an expense during the term of any repayment.  Depreciation, however, can be spread over 5-7 years on long-lived equipment.  The same equipment on an FMV lease can (effectively) be 100% expensed during whatever lease term you select for the lease.  For example: you enter into a 36 month FMV lease on equipment that would otherwise have to be depreciated over say, 5 years and you will effectively have written off all of its value in just 3 years, instead of 5!

Tax Code: Expense Detail

This expense deduction is provided for taxpayers (other than estates, trusts or certain non-corporate lessors) who elect to treat the cost of qualifying property as an expense rather than a capital expenditure. Under Section 179, equipment purchases, up to the amount approved for a given year, can be expensed (deducted from taxable income) if installed by December 31st. Any excess above the expensed amount can be depreciated depending on the equipment type. Not all states follow federal law. Contact your tax advisor for the specific impact to your business or visit www.irs.gov.