Tax Implications of Financing Purchases for Businesses

May 19, 2016 Published by

If your business needs equipment to operate, the decision to purchase, finance, or lease your business equipment will affect your year-end taxes in different ways. From cash registers to medical equipment and big, heavy equipment like tractors, dump trucks, or even airplanes, the purchase or lease of business equipment must be accounted for on your taxes. At Hogg, Shain, & Scheck, our professional accountants can take care of all the tax implications for your business, including the financing and purchasing of business equipment.

Routes to purchasing business equipment and the tax implications

There are three options for acquiring business equipment over the long term and each one follows different tax rules.

  1. Purchase Financing
    When you finance a purchase for your business, the purchase automatically becomes a company asset. This means that you will be able to deduct the interest paid on the purchase from your company’s annual income. You will not be able to deduct the principal payment. However, you may claim depreciation expenses, also known as Capital Cost Allowance (CCA), on a yearly basis for the life of the equipment.
  2. Operating Lease
    When you lease equipment for your business, the equipment is not considered an asset, unless you decide to take advantage of a purchase option. Until then, the entire amount of the lease you pay from month to month is deducted from your company’s annual income. This includes both the interest and the principal. However, because there is no transfer of ownership, you do not control the equipment as an asset and therefore, you cannot deduct depreciation expenses or CCA.
  3. Capital Lease
    This type of lease is similar to an operating lease except that the equipment is considered a fixed asset. However, both the interest and principal is deductible, while there are no depreciation expenses or CCA that can be claimed for the life of the lease.

When you choose to work with the professional accountants at Hogg, Shain, & Scheck, we can help you understand the different options for purchasing or leasing equipment for your business along with the tax implications for each situation. We can help you determine which option is best for your new or growing business and even assist you in acquiring the financing you need by being a trusted advisor and representative for your banking relationships. Contact Hogg, Shain, & Scheck today to schedule an appointment and answer any remaining questions you may have.