Leasing converts a large capital expenditure into small monthly payments. Hence the company has the profit-making equipment immediately and keeps their cash reserve available. Rather than investing the precious cash reserves in depreciating assets, the company can use them to help increase profits.
Lease Rental is 100% Tax deductible
The main reason that the majority of companies lease rather than purchase equipment is that they use leasing as a method of reducing their tax bills. This is because lease rental is 100% tax deductible, meaning that all payments you make for your equipment are written off against your tax bill. For any profit making business, this means a substantial saving in real cost of acquiring equipment by lease rental. This could save you between 20-40% of your lease payments, depending on the rate of tax you pay. Payments on qualifying leases are written off as direct operating expenses, rather than a debt or outstanding liability, thus reducing short term taxable income. Any capital allowances are passed on to you, you can offset your rentals against taxable profits and you can also reclaim the VAT on your monthly payments. This status as a rental as opposed to a liability on a companies balance sheet is something the banks like to see, which is why an operating lease can be attractive. For this reason, leasing is often referred to as ‘off balance sheet’ financing – a tremendous advantage to both large and small business’s.
Ownership at the end of the lease
Lease rental is just that, a rental agreement, Title of the goods remains with the Lessor (ie BOSEF), which means the equipment does not show on the companies balance sheet, therefore not needing to be depreciated over a fixed period. As a broker we are the third party involved within the lease agreements, therefore we buy the equipment from the funder and then sell it on to the customer. This means that the customer can take full advantage of all the benefits of leasing but still owns it at the end. (Tax loop-hole)
The disadvantage of buying equipment outright
The disadvantage to buying equipment out-right, is that the capital invested becomes a depreciating asset. This is an asset whos value decreases overtime.The total amount that assets have depreciated by during a reporting period is shown on the cashflow statement, and also makes up part of the expenses shown on the income statement. The amount that assets have depreciated to by the end date is shown on the balance sheet.