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Union Commercial Capital

Tax Benefits of Leasing Equipment in 2023


Many business owners aren’t aware you don’t have to purchase equipment outright with cash to save on your income taxes. If you acquire equipment this year using a loan, lease, or finance agreement, you may be eligible for a potential tax benefit. Nearly 80% of U.S. companies lease some or all of their equipment. That's because leasing allows them to compound their annual returns through deductions, property swaps, and lower tax rates. By leasing equipment, your business may be eligible to take advantage of these benefits.

Be sure to consult a tax professional before leasing equipment

Remember: Be sure to consult your CPA or tax advisor to discuss whether your equipment is eligible for tax savings. If you are considering leasing equipment this year, keep reading to learn more about its potential benefits and key differences between lease structures.


Can You Write Off Equipment Lease Expenses?

Business owners are allowed to deduct lease payments on their taxes. The way your lease is structured can impact tax benefits available to you.

There are two ways you can set up your leased equipment: Capital Lease and Operating Lease. Learn about each structure, key differences, and how they can affect your tax benefits.


Differences Between Capital and Operating Leases


Capital Lease

A capital lease is a contract that coveys a purchase of an asset. For accounting purposes, a capital lease is treated as if it were actually owned by the lessee and is recorded on the balance sheet as such.

This is important because to use deprecation as a deduction, the IRS requires you to own the property. Luckily if you have a capital lease like an EFA (Equipment Financing Agreements) or a $1 buy-out option, you can claim depreciation over the useful life of the asset.


Operating Lease

An operating lease is a contract that allows for use of an asset without transferring ownership. This type of lease is usually written with either a fair market value purchase option or a fixed purchase option, such as 10% of the equipment cost.

Since the lessor still maintains ownership of the equipment, businesses can’t claim depreciation. However, because an operating lease generally counts as a rental expense, it still qualifies for tax incentives! Business owners may be able to write-off their lease payments.


Recap of Potential Tax Benefits for Leasing Equipment

  • True Tax Lease: Monthly payments may be deductible during the life of the lease.

  • Section 179 (EFAs/$1 Buyout): 100% of the equipment may be deductible in the year it is acquired and used.

  • Choose to accelerate your tax benefits according to your business needs.


Considering Leasing Your Next Equipment Purchase?

If you acquire equipment this year, remember to discuss your write-off options with your certified public accountant (CPA) or tax advisor. We can’t provide specific tax information for your business. Please contact a tax professional for more information.

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