Tax Benefits of Equipment Financing vs. Leasing

Tax Benefits of Equipment Financing vs. Leasing

How familiar are you with the tax code? It’s not exactly light reading, but there are sections of it that are relevant to your business. In the agriculture industry, equipment is essential to your operations. Your equipment is also one of your biggest expenses, if not the biggest expense. The tax code offers avenues for you to ease the financial burden of your purchasing equipment.

But not everyone buys their equipment. There are those who opt to lease the equipment they need instead. It’s important to distinguish between the two because financing vs leasing makes a big difference when it comes to the potential tax benefits for your business.

Equipment Financing vs. Equipment Leasing

Equipment loans are no different from a standard loan you might apply for when buying a car or a house. You are borrowing a lump sum of money from a lender, which must then be paid back in installments, plus interest, over a period of time. In the case of an equipment loan, the money must be used specifically for the purchase of equipment. That piece of equipment also serves as collateral to secure the loan, so there is less emphasis on the borrower’s credit history.

Leasing equipment is similar but with key fundamental differences. First, you are not purchasing the equipment. You are essentially renting it for a period of time. You will negotiate terms with the leasing company regarding the length of the loan and the amount you’ll be paying each month in monthly rental payments. But at the end of your lease, you will not own the equipment.

You can certainly negotiate an extension of the lease if you wish to continue using it, or buy the equipment outright from the lender. But the appeal of equipment leasing is the opportunity to use the equipment you need without having to take a substantial hit to your cash flow.

Tax Benefits of Equipment Financing

Tax breaks work to the advantage of every smart business owner. Equipment financing is no different When you finance the purchase of equipment, you are paying interest with each monthly payment. You are not able to use the principal of the loan as a tax write-off, but the interest paid each month is considered a tax deduction for most equipment loans.

Section 179 of the U.S. internal revenue code also provides the allowable deduction limit of $1,000,000 on the cost of new and used capital equipment purchased with an investment cap of $2,500,000. To go along the savings from the Section 179 deduction, you have the Bonus Depreciation, which allows you to take additional depreciation on new and used capital equipment purchases. But Bonus Depreciation is scheduled to be phased out by Jan. 1, 2027.

Tax Benefits of Equipment Leasing

Not all tax savings are limited to equipment financing. Leased equipment can also be eligible for Section 179. You can write off the entire lease payment as a business expense by deducting the monthly lease payments on your taxes, as long as your lease meets the qualifications. The goal of Section 179 is to empower small and medium-sized businesses to invest in the development of their businesses and be able to purchase new or used equipment to support their operations.

To get the financing you need to purchase new and used commercial, residential, and agricultural equipment, explore your options with TriGreen Equipment and John Deere Financial.

Disclaimer: This information is provided as a customer service by your John Deere dealer and John Deere Financial. However, it is not and should not be construed as tax advice. We strongly recommend that you consult with your tax advisor regarding how these tax-saving opportunities apply in your situation.