ss_blog_claim=bd50edc517cf0b7549fe6b5f63b6b5f8 The SLS Business Finance Blog: Leasing and Taxes

Monday, June 11, 2007

Leasing and Taxes

Leasing your new equipment provides some tax advantages. I'm not a CPA (but you should consult one with any questions about tax ramifications) but here's what I do know and recommend:

1) Depreciation for Equipment owned outright is front loaded. This means that the 1st year for certain and probably the 2nd year too, the depreciation value would be tax favorable. In other words, you could deduct more off your taxes as an expense in year 1 and year 2.

2) On the other hand, because depreciation is front loaded, this means that in Years 3, 4 and 5 that you continue using the equipment you get to deduct less and eventually nothing through depreciation.

3) When equipment is leased the amount you get to deduct as an expense is consistent each year and easier to calculate. It amounts to the entire value of your monthly lease payments over the course of the entire year, and therefore the entire leasing period.

4) A standard lower cash outlay (in the 5-10% range) is needed for leases. Sometimes bank loans require up to 20% down or more if approval amounts by the bank don't match the cost of the equipment. A classic example of this is the bank approval of 25k for the purchase of a 50k piece of equipment. This happens more often than we'd like to see in banking but NEVER happens in the leasing industry. It's always 100% of the value less the down payment requirement.

So buying equipment has advantages, especially if a big tax bill for the current year is anticipated, but the overwhelming majority of the time, its more tax advantageous to lease the equipment and get the same amount in writeoffs every year.

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