Tax Benefits of Leasing

Equipment Leased and put in service by December 31, 2005 can be expensed on your 2005 taxes (deducted from taxable income).

Small business owners don't need to learn the Internal Revenue Code by section number, but it PAYS to remember IRS179, perhaps the best small business break of all. IRS179 allows a business owner or C Corporation to deduct up to $105,000 of business asset purchases as current expenses. This produces an immediate write-off of capital assets.

IRS Section 179

Under IRS Section 179, a business may buy assets at any time during the year and deduct the costs in full (up to the amount shown below) as long as they are "placed in service" in that same year. Leases written as a Finance Lease, qualify for this deduction in their year of inception. Any excess above the expensed amount can be depreciated over 5 to 7 years depending on the equipment type.

The maximum amount of asset cost that can be expensed by year is $102,000 for 2005 and 105,000 for 2006.

For example, if you purchase or lease a piece a equipment (or pieces of equipment) for $126,000 and installed it in 2006, you are eligible to take a $105,000 tax deduction in 2005. The remaining $21,000 would be depreciated over the life of the asset.

1208. Election to Expense Certain Depreciable Business Assets

An expense deduction is provided for taxpayers (other than estates, trusts or certain non-corporate lessors) who elect to treat the cost of qualifying property, called Sec. 179 property, as an expense rather than a capital expenditure. The election, which is made on form 4562, is to be attached to the taxpayers original return (including a late filed original return) or an amended return filed by the date due of the original return (excluding extensions) for the year the property is placed in service and may not be revoked without IRS consent [94FED, 12, 120]. Employees may make such elections on Form 2106.

For 2006, the maximum Code Sec. 179 deduction is $105,000. The ceiling is reduced by the excess cost of qualified property placed in service during the tax year over $200,000.

The total cost of property that may be expensed for any tax year cannot exceed the total amount of taxable income (determined after the application of the investment limitation) derived from the active conduct of any trade or business during the tax year. Costs disallowed under this rule may be carried forward an unlimited number of years subject to the ceiling amount for each year.

To qualify as Code Sec. 1245 property depreciable under Code Sec. 168, it must be property that is acquired by purchase for use in the active conduct of a trade or business.

Tax Benefits by Lease Type:

Finance Lease

The benefit of a Finance Lease is that you can take advantage of IRS Section 179 and the expense up to the amount allowed for the year the equipment is installed. You may depreciate any excess on the depreciation schedule for that particular asset. Typically, a finance lease is a full payout, non-cancelable agreement. You are responsible for maintenance, taxes and insurance.

Example: The equipment is installed in 2006 and the cost is $37,000. Using IRS Section 179 and assuming a 33% tax bracket, your tax savings would be $37,000 x .33 = $12,210.

Note: If you finance the above $37,000, you may want to check with your tax professional to be certain that a ghost income is not generated after the 179 deduction is exercised.

Tax Lease / True Lease

The benefit of a Tax Lease or True Lease is that the lessee may be allowed to claim the entire amount of the monthly investment as a tax deduction. Many rental contracts qualify as a true lease. A tax lease or true leases are leases for which the lessor retains ownership.

Example: Monthly investment is $1,000. Term is 36 months. Assuming a 33% tax bracket, your monthly tax savings would be $1000 x .33 = $333. Total over the term would be $11,988.

Note: This information is intended to explain the tax benefits of leasing. New and updated information may be available through your tax professional. Please consult your tax professional to determine the best structure for your organization.