Operating Lease Tax Benefit Examples

Selling Price = $100,000
Customer’s tax bracket = 33%


If your company is paying with cash, it would be paying with after-tax dollars. Effectively, that would equate to $133,000.00 paid for the asset.  This example does not take into consideration the internal cost of funds or the opportunity cost of tying up the capital in their equipment purchase.


Freeing up the cash in this example in the early years (such as by financing the equipment) allows the company the ability to pursue additional projects and earn an additional return on those project investments.









A true tax lease allows the customer to expense 100% of each monthly payment. This benefit means real tax savings to you.


Selling Price = $100,000
36 Month Payment = $3,620 (w/ no purchase option)
Tax Savings = $3,620 x 33% = $1,194.60 (x 33 = $39,421.60 over the lease term)
Net payment = $3,620 - $1,194.60 = $2,425.40
Net cost of equipment = $2,425.40 x 36 months = $87,314.40 for a $100,000 asset.


Notes: 


A. Two additional factors are generally considered when evaluating the merit of a true tax lease versus a cash purchase;


  • Capital Available (Do you have the excess capital to tie-up in purchasing the asset?);

  • If the answer to #1 is YES, then what is the internal rate of return on your company’s capital (when you allocate budget to company projects, what is the expected internal rate of return)? If you make a better return investing your capital on internal projects, it is generally advisable to lease the asset and conserve the company’s capital for internal investment. In most instances businesses can realize a better return investing their capital into their operations as opposed to becoming an internal lender.

B. To obtain a more accurate view of the relative merits in a “true lease versus buy” decision, you would need to compare the tax savings ($39,421.60 over the life of the lease in the example above), versus the depreciation of that asset over that same time period. You would also track the cash flow timing of that savings, because savings early in the term saves interest costs. The exact results vary based upon you elected depreciation method; i.e. straight line, double declining balance, MACRS, etc.