When entrepreneurs are launching startups, they may need to fill a new location with furniture, equipment and technology before they can open their doors. Similarly, established business owners might find they need to upgrade current equipment or bring in additional machines to fulfill a higher volume of orders when they experience a growth spurt.
Cash flow is tight in most small businesses, and as a result, owners often don't have the capital on hand to make a large lump sum payment for new supplies. Fortunately, there are other options. Equipment leasing is a viable solution for many independent firms, and is growing in popularity. The U.S. Department of Commerce found 31 percent of all equipment acquired by small businesses is done through leasing.
Enterprise owners may continue to choose renting as they learn about the benefits it offers over buying, including greater flexibility, the freedom to hold on to much-needed cash flow and tax breaks. To help small business owners understand these advantages, Five Point Capital is offering the following information about equipment leasing tax benefits.
As a precaution, Five Point Capital would also like to remind business owners that lease terms vary, so it's important to consult with a tax expert to ensure they qualify for certain benefits.
- Businesses can deduct lease payments from taxes
There are two basic types of leases for equipment – finance and true – each offers different tax benefits based on the expected outcome of the contract (i.e., is it a rent-to-own agreement or do they plan to return it when the lease is up).
A true lease, which is also known as a tax lease, allows borrowers to return the equipment at the end of the contracted period. However, many contracts also provide owners with the option to buy the machinery when the agreement ends.
Since owners are not paying installments toward the purchase price and do not cover the total costs of the equipment, the IRS allows borrowers to deduct lease payment costs in full.
- Owners can claim depreciation on equipment
If owners prefer to make installment payments toward a purchase, they might want to consider a finance lease. These are similar to rent-to-own agreements in which the borrower assumes some ownership responsibility and makes payments that reflect the true value of the equipment. At the end of the terms, they can usually buy the machinery for a small price.
Since these costs can be considered capital investments, owners won't be able to deduct monthly installments, but can instead claim depreciation on the leased equipment, explains Inc. Magazine.
It can be challenging for small business owners to navigate legal jargon and understand complicated tax terms, especially when they are under pressure to fill orders on a tight deadline. If owners and entrepreneurs need additional advice to make the best choice for their firms, they can turn to Five Point Capital, which has ample experience working with small businesses and can offer flexible financing options to fit their needs.