In addition to the many business and financial benefits you can gain by leasing, one of the best reasons to lease equipment is that it can reduce how much you pay in taxes.
Expense Deduction Benefits
With owned equipment, you’re allowed to deduct depreciation and interest expenses from your taxable income, but not principal payments. And the depreciation deductions follow a schedule set by the IRS. For example, you can only take a half-year’s depreciation deduction for an asset in the first year you purchase it and place it in service.
With a lease, you can deduct your entire lease payment as an expense, which will allow you to write off expenses quicker. This shorter period means a larger deduction each year, lowering your taxable income and decreasing your taxes.
Extra Benefit for Year-end Acquisitions
If you’re planning on acquiring a lot of equipment at the end of the year, leasing can be an appealing alternative to purchasing because of IRS depreciation deduction rules. When more than 40% of your equipment is purchased during the last quarter of the tax year, a “mid-quarter convention” is applied and you can only deduct 1-1/2 months of depreciation for the equipment bought in the last quarter, even if you’ve been using it for the full three months. However, when you lease the equipment in the last quarter, you can deduct your lease payments as a business expense for the tax year.
Choosing the best lease option
Tax codes and decisions can be complex, so you should always follow IRS tax guidelines and consult with your accountant about the best financing alternative to lower your taxes.
Be sure to consult an accountant about which type of lease is right for you.