Why has Equipment Leasing Arrangement become very popular to both Lessors & Lessees?
Equipment leasing is very attractive for both for the lessor and lessee involved in this Equipment Leasing arrangement!
Benefits to the Lessee.
Equipment leasing has provided considerable tax benefits for the company that is renting and using the equipment. Here are some of the benefits as shown below:
1. It allows capital to remain available for other business purposes;
2. It contributes to a possible reduction of debt from the company balance sheet; (that is, if the equipment was purchased as an alternative to leasing, then there is a potential debt that would be generated from this acquistion which would be placed on the balance sheet).
3. It allows a possibly less expensive means of financing;
4. It provides a way to eliminate the problem of disposing of equipment which may have become obsolete after years of use.
Benefits to the Lessor/Investor.
Equipment leasing has provided considerable tax benefits for the company that is leasing out the equipment to other parties. Here are some of the benefits as shown below:
1. The Lessor can deduct depreciation expenses and can take advantage of accelerated depreciation methods and section 179 election applicable for that year.
2.The Lessor can deduct interest on the loan to acquire the equipment to be leased.
3. The Lessor can deduct any operating expenses, (many of which may be deducted up-front).
There are numerous examples equipment that are leased ranging from computers, aircraft, medical equipment, equipment used for oil drilling, railroads, cable television, pollution control devices, and a many other types of personal property.
In an equipment leasing program, investors acquire the equipment which is then leased to other parties. Usually, all equipment leasing programs involve borrowed money as well as the investors' own capital contributions.
There are clearly some potential pitfalls that may occur in an Equipment Leasing arrangement. These include the at-risk rules and the very stringent tests the IRS applies to an equipment-leasing program to determine whether or not that arrangement is indeed, a lease rather than a conditional sale.
It is worth noting that for the most part the activities in an Equipment Lease arrangement will generate a passive loss for the investors in a limited partnership arrangement will report a passive loss. These investors should be aware of the IRS tax code that stipulates that passive losses are deductible only to the extent of passive income.