Equipment Leasing and Taxes

By | March 29, 2021

In my last post, I went over book accounting and tax accounting. Now let’s take a look at how each views leasing.

The first point I want to make is the one overriding factor that any business needs to determine is their goals for a lease first, then they should choose a lease that best meets their needs.

There are really two “main-yet-different” goals for any lease: either you are leasing equipment to take advantage of the benefits of “ownership” (like Section 179), or you are leasing to “not own” the equipment, thus keeping the equipment off the balance sheet as an asset and instead listing the lease payments as an expense. 

First let’s take a look at how Tax Accounting (e.g., the IRS) views leasing. They will look at any lease one of two ways: a True Tax Lease (also called a True Lease), and a Non-Tax Lease. A True Lease means the lessee (the company using the equipment) is NOT the owner of the equipment. In a Non-Tax Lease, the lessee is considered the owner. 

So if you want to not own the equipment and keep it off the balance sheet as an asset and instead expense the lease payments, choose a True Lease. If you want to be considered the owner and take a Section 179 deduction, choose a Non-Tax Lease.

Now since this post is about leasing and taxes, I ought to stop right there, because that’s all you really need to know. But I’m a little OCD and want to finish, so let’s take a look at how Book Accounting views leasing.

Book Accounting leases are classified as either an Operating Lease or a Capital Lease. In an Operating Lease, the equipment is viewed as a rental – it’s neither an asset or a liability on the balance sheet. A Capital Lease is generally viewed as ownership.

These all seem similar, right? But “book accounting” and “tax accounting” don’t always see eye to eye on lease types. For example, a True Lease doesn’t always qualify as an Operating Lease, but an Operating Lease always qualifies as a True Lease.

I won’t go any further than that, because it’ll get into things that we all need to discuss with our CPA’s, not an equipment finance guru’s blog! And this is why I said earlier “pick your goal first, then pick a lease”, and we’ll get more into that next time. 

[As always, this is not intended to be tax advice – always consult your tax adviser for details specific to your situation.]

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