tax efficient lease

Introduction

Leasing is an important form of financial transaction which offers advantages to both lessee and the lessor over buying and selling assets. Lease is a contractual agreement between lessee and lessor, wherein the lessee pays lease rentals to the lessor for the use of an asset owned by the lessor. Leasing not only helps in asset acquisition but also enables better utilization of capital, which might otherwise remain locked while waiting to acquire enough funds to purchase the asset.

Types of lease

Leasing can be of two types – Operating Lease and Financial Lease.

Operating Lease – Under this type of lease, the lessor owns the asset and leases it for a period and for a set rent to the lessee who generally does not bear any costs for maintaining the asset or for disposal of the same. Operating lease is a non-banking financial agreement and hence does not appear in the balance sheet of the lessee.

Financial Lease – Under this type of lease, the lessee pays lease rentals to the lessor for the use of an asset over a particular period of time. At the end of the period, the lessee can purchase the asset at a pre-determined residual value, or if they wish they can return the asset to the lessor. Financial leases appear in the lessee’s balance sheet as assets and liabilities, thus impacting its financial performance.

Advantages of leasing

Leasing offers distinct advantages to both lessor and lessee. Following are some of the advantages.

For Lessees

1. Avoids large cash outlays as the lessee can get the desired asset usually with a small initial payment.

2. Greater flexibility as the rental agreement can be custom-made based on the lessee’s needs, rather than buying an off-the-shelf product.

3. Easily Upgradeable: Lessees can upgrade to a newer model at the end of the lease period and reduce their overall financial obligations.

4. Tax benefits: Lease rentals can be deducted as business expenditure in certain cases.

For Lessor

1. Steady income: Lessor can use the lease rentals to generate a steady income and this practice also helps them to adjust their income level in the case of economic downturns.

2. Uniform asset distribution: Leasing makes it easier for the lessor to distribute their assets in a more uniform way thereby reducing the risk of asset overutilization.

3. Asset utilization: Leasing also helps in better utilization of idle assets thus ensuring better capital utilization.

Disadvantages of Leasing

Leasing also has some drawbacks. Following are some of the disadvantages.

For Lessees

1. Higher costs: Lease rentals may add up over the course of the lease, thus upfront costs may be lower but overall costs may be higher when compared to outright purchase.

2. Limited customization: Lessees do not have the freedom to customize the asset which might not match their requirements.

3. Tax concerns: Depending on the jurisdiction, some leases may be considered as secured loans, which could have certain tax implications.

For Lessor

1. Unpredictability of income: As the customers return the asset at the end of the lease period, the lessor would not know when they will be getting the next set of income.

2. Prolonged asset recovery: If a lessee fails to return the asset at the end of the lease, it could take few months for the lessor to recover their asset.

Conclusion

Leasing is an important form of financial transaction which offers advantages to both lessee and the lessor over buying and selling assets. Although it provides certain advantages, lessees and lessors need to be aware of the drawbacks associated with it before entering into a leasing agreement. It is important to properly evaluate the terms and conditions of the agreement before signing it. Proper research is necessary for both parties so that they can understand the implications and benefits of the agreement before signing it.

Leasehold Taxation (or Rent Tax) is a tax imposed on tenants who rent property. This type of taxation is mainly found in the United States, although some countries also have similar policies. The taxes are usually paid to the local or state government, although in some cases the landlord collects the taxes from the tenant.

The amount of taxation levied on leaseholds depends upon the type of property being rented, the duration of rental period, the rental value and the local government laws. In some states, the taxes can be reduced if the renters meet certain criteria like income level, or if part of the property is for public use.

Generally, the taxation rate for leaseholds is higher than for other kinds of property. The reason for this is that with leaseholds, the landowners are considered to have advantageous terms as tenants, and consequently the taxation rate is higher than for other kinds of property.

Leasehold taxation can be beneficial to local governments in several ways. Firstly, the taxes allow government to collect revenue from the rentals that they would not have been able to collect if not for the tax. Secondly, this kind of taxation encourages tenants to remain current on their tax obligations. Finally, the taxes ensure that local governments can continue to provide public services and programs.

Leasehold taxation should be taken into consideration when looking to rent a property. As landlords determine the rental price, knowing the amount of taxes levied on the property can help tenants understand what is included in the rent. Additionally, understanding the taxation rates may help tenants plan for their overall financial budget when leasing a property.