As a business owner, you will surely be confronted with this choice: "Should I buy or lease new equipment for my business?"
This decision should not be made without first considering the tax implications of each option. Is it better to finance the purchase, sign an operating lease or sign a capital lease in your current situation?
In this article, find out what business accounting factors should be considered for each of these options.
Tax implications of financing the purchase of new business equipment
When you finance a purchase for your business, it automatically becomes a business asset. When you file your corporate tax return, you need to understand the federal and provincial tax implications of these purchases.
First, you should be aware that you cannot deduct the amount of capital as such. However, you can claim capital cost allowance (CCA) when you file your income tax return on an annual basis depending on the life of the equipment in question.
If you borrowed money to finance this purchase, it will be recorded as a liability. Interest on the purchase of new equipment will be deducted from your taxable income for the specified period.
Taxation and operating leases of business equipment
An operating lease is an agreement that gives you permission to use an asset or occupy a location without access to the benefits or risks of ownership.
Since you have no ownership of the property in question, there are a number of tax implications to consider. First, the expenses you pay to rent the property will not be recorded as a liability and will not be included in your assets. The property is not under your control and, as such, is not your tax responsibility.
In addition, no depreciation or interest charges will be shown on your financial statements. However, your financial institution will be able to see your operating lease payment amounts. These will be deducted from your expenses, reducing your business taxes.
Tax implications of a capital lease
A capital lease, somewhat different from the above, allows you to acquire part of the property in question. In other words, in signing such an agreement, you are responsible for assuming the benefits and risks associated with the ownership of the asset.
For tax purposes, a capital lease means that you are in control of the asset. The interest and capital on this material or equipment are tax deductible. However, CCA cannot be claimed for the term of the lease.
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In summary, different tax implications apply to your business depending on whether you are financing a purchase of new equipment or signing an operating or capital lease. You can always consult a tax accountant to find out which option would be most viable for your situation.
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