I’ve had leasing equipment on my mind lately.
Even though I’m quite schooled on the advantages of leasing equipment and I’ve spoken about it in this blog previously, I never really expressed just how flexible it is, and how it could help companies of any size, no matter their goals.
I also never really got into the accounting principles of leasing, and how the different types of accounting look at leasing. This is actually an important part of the leasing equation, and we should discuss it.
So let’s start a new series on leasing. In the weeks that follow, we’ll discuss:
- The Two Different Accounting Principles – Book Accounting and Tax Accounting.
- How the Two Accounting Principles View Leasing.
- The Advantages of Leasing – Taxes and Balance Sheets.
- Types of Leases and How They Help Companies.
We’ll dive deeper into these topics, but for now, I’m going to give a very big-picture overview: There are generally two main ways a lease can be viewed in an accounting sense – depending on the type of lease, either the leased equipment is seen as “owned” by the company in a tax and balance sheet sense, or it isn’t.
There are advantages to both ways, depending on a company’s size and goals. Some companies (usually smaller businesses) want the tax advantages of ownership, including claiming a Section 179 deduction. So they will choose a lease structure that offers that.
A larger company may prefer to keep the leased equipment off the balance sheet, and have it viewed almost akin to a “rental”. They cannot claim a tax deduction or depreciation of course, but they can also treat the equipment as an expense, which has its own set of advantages (for example, expenses may not need board approval, where capital expenditures may).
The bottom line is, leasing is incredibly versatile for businesses, and can be an excellent tool in aiding a company’s growth. Stay tuned for more on this interesting topic.