Tax Benefits of Leasing

Why Leasing is Cheaper Than Paying Cash »

One of the many myths that the general business owner believes is that paying cash for capital equipment is more cost effective than leasing said equipment. There are a few very basic elements that make leasing capital equipment, over paying cash, the right choice 99% of the time.

Pre Tax and Post Tax Dollars »

The first step in understanding the benefits leasing has over paying cash is to understand how taxation plays into the equation. When a business pays cash for a piece of equipment they are essentially paying with “Post Tax Dollars”. While a business may have the cash on hand to acquire equipment paying with Post Tax Dollars is essentially like adding 34% to the sale price of the equipment.

Leasing on the other hand allows you to use “Pre Tax Dollars”. Lease payments can be written off as expenses. Within the structure of a true lease the leasing company owns the equipment and you are agreeing to a long term rental of the equipment. Rental payments are considered expenses and can be written off as such.

For every dollar you spend on equipment when paying cash your actual cost is $1.34. Since every lease payment is tax free a dollar costs $1.00.

Time Value of Money »

When considering the benefits of leasing a business owner must keep the “Time Value of Money” in mind. The key element here is inflation. Today’s money is worth more than tomorrow’s money. That is a fact. Leasing allows business owners to retain stronger dollars today while making lease payments with weaker dollars in the future.

Working Capital and the Cost of Capital »

Conservative estimates state that the average business sees a 10% return on its working capital. When you pay cash for equipment you immediately lose the opportunity to reap this return on capital. Because most capital equipment acquisitions are regarded as income generating investments, leasing allows you the opportunity to generate a greater return on working capital while enjoying the income generated by your equipment or software acquisition. You get the best of both worlds when taking advantage of an equipment or software lease. Leasing also allows you to match your stream of payments to the income the equipment is generating monthly.

 

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