The tax benefits of leasing
Leasing enables the cost of capital expenditure to be spread and paid in manageable monthly leasing payments. Hence a business has the income generating equipment it needs immediately and it can keep its cash reserves available for other needs.
Rather than investing cash in depreciating assets, the company can use them to help increase its profits.
Tax relief may be available when acquiring business assets. The types of relief available depend on whether you buy them outright, or on the type and length of the lease. The way in which you fund the acquisition also affects whether VAT will be charged upfront or spread over the length of the funding agreement.
Leasing has potential favourable tax treatment over a purchase. In a true lease, you can in most cases deduct the entire amount of the monthly payment as an operating expense; in a purchase, the equipment is depreciated. Not only can the tax treatment under a true lease allow for greater tax savings, but the accounting work is made easier.
Moreover, certain types of lease financing qualify for accelerated depreciation expense under Section 179 of the IRS code. This allows a business to "front load" the tax savings and realise them in the year the equipment is acquired.
In most cases the cost of leasing an asset is deductible as a business expense so this can reduce your overall tax bill.
This could mean a saving of between 19% - 40% of the lease payments, depending on the rate of tax applicable to your business.
HOW THE TAX ADVANTAGES OF LEASING WORKS - IN NUMBERS*
You lease a machine that costs £5,000 + vat over a 3-year term.
The monthly payments would be £176.75 + vat or £40.79 + vat per week.
The total amount paid over the term of the Lease would be £6,363 + vat.
Tax may be reclaimed at a rate of 19%* over the term of 3 years, equal to £1,208.97
Therefore, the net cost of the lease is £6,363 - £1,208.97 = £5,154.03*
This example is for illustration purposes only. The figures which apply to you may vary depending on your own tax position and financial status.
*Rates correct at time and may be subject to change. You are advised to seek independent financial advice.
When you buy plane, machinery and IT equipment, you can deduct a proportion of the cost from your tax profits each year - known as capital allowances.
You can claim capital allowances if the equipment is:
- bought outright
- bought through hire purchase
- supplied under a long funding lease - over seven years (sometimes five years)
You can't claim capital allowances with shorter leases or if you don't have sufficient tax profits. However the leasing company can, so you should benefit indirectly through lower rental charges.
There are several advantages of leasing equipment:
|You don't have to pay the full cost of the asset up front, so you don't have to use up your cash or have to borrow money|
|You have access to a higher standard of equipment, which might be too expensive for you to buy outright|
|You pay for the asset over the fixed period of time that you use it, which helps you budget for the future|
|As interest rates on monthly lease costs are usually fixed, it is easier to forecast cash flow|
|You can spread the cost over a longer period of time and match payments to your income|
|The business can usually deduct the full cost of lease payments from taxable income|
|If you have not bought the asset outright, you won't have to worry about any overdraft or other load taken out to finance the purchase being withdrawn at short notice, forcing early repayment|
|Very often there is little or no deposit to find to have the equipment delivered almost immediately|
|On 'long funding leases' - finance leases over seven years and sometimes over five years; and some long operating leases - capital allowances are usually available on the cost of the assets|
|If you need to upgrade or replace the equipment, this can normally be handled by amending the existing agreement - which is a quick and simple process|
The information on this page is generic in nature. Whilst it is likely to be correct for most trading businesses, the benefits of leasing will vary depending on your own tax, financial and accounting position. We recommend that you consult your own accountant or other professional adviser to check how these will apply to you.
Tax rules are subject to change and the information on this page is correct at the time of its production.
All information on this page has been provided by our leasing provider, Kennet Equipment Leasing Limited.
Kennet Equipment Leasing Limited is regulated by the FCA for the purposes of agreements governed by the Consumer Act 1974.FRN 676024. *Finance subject to status and credit checks.
Stocks Sewing Machines Limited is authorised by the Financial Conduct Authority for the purposes of secondary credit broking. Firm Reference Number 663301. All finance is subject to terms and conditions, number of years trading, and may also be subject to credit checks. Pricing and rates used on this calculator are for example purposes only, please contact us for more information.