It’s an age-old question for business owners: Should I lease or own my equipment? In many cases, the entrepreneur’s financial situation may be what dictates the decision. If you do not have the cash upfront to purchase the equipment you need to run your venture, you’ll have to lease it. All is not lost. In fact, many business owners choose to lease their equipment instead of buying it even when they do have the operating cash flow. Why? Because financing your equipment offers some nice tax benefits.
Tax Deductions
Each year at tax time, the IRS re-evaluates existing tax credits and deductions alongside offering new ones. This can be confusing to any business owner who didn’t major in accounting. Reading through the latest and greatest credits can be daunting, but there is one full-proof deduction year after year, and that is the cost of running your business.
Business expenses remain deductible every tax season, and if you finance your equipment, those lease payments are considered a business expense. This deduction is subtracted from your annual profits, which reduces your taxable income. And if you think about it, when it comes to tax benefits, the best ones are the ones that reduce your overall tax bill.
Why the Deduction Works
In most instances, tax deductions oftentimes save filers more money than credits. Tax credits are also subtracted from your overall taxable amount, but they are limited to a maximum number. For example, assume the IRS is offering a $1,000 credit for new business owners who purchase energy-efficient lighting systems. The maximum amount you can deduct from your profits is that $1,000.
If you deduct your business expenses, you can claim your lease payments up to the maximum cap, which is much higher than tax credits generally. Assume that the cap for your lease expenses last year is $500,000 and you spent $12,000 leasing your energy-efficient lighting system. You should be able to deduct $12,000 from you profits, which is much more than the $1,000 tax credit.
Whether to buy or lease depends on the business owner’s overall profits, losses, and financial health, but in most cases leasing your office equipment offers tax benefits sure to help you reduce your taxable income. At year’s end, you want to show that your business made money, that’s a no-brainer. The more you can deduct from that profit, however, the better for your company, as this means less bottom line for Uncle Sam to ding when it’s time to settle your business tax bill.