More small businesses than ever are starting to learn what publicly traded companies have known for years. Rentals and leases offer accounting benefits over purchases when it comes to equipment acquisition. The main benefit for blue chippers was their ability to paint a transaction that was more sales like in nature, as a lease.
Why Would They Want to Do That?
The FASB standard was on their side for years, and this system kept large assets off the balance sheets of these companies. It has since changed. We won’t get into it very deep here, but balance sheet numbers are what market experts use to determine value ratios. One point simply put, inflated asset numbers will result in poor ratios. This is why not having assets on their balance sheet (aka something they bought and own,) is a desirable goal.
Many small Businesses don’t even have a Balance Sheet!
Most of the people searching for equipment rentals lemont il are probably going to immediately draw this conclusion! This is certainly true; many small businesses don’t have a balance sheet, and if they did, analyst market ratios wouldn’t be as imperative as they are for the largest companies. All businesses pay taxes, however. This is where the advantage can come in handy.
What Advantage are you Talking About?
We’re talking about an advantage that draws its power from the concept of a business expense versus a capitalized asset. Even for individuals and small businesses, the IRS is collecting information in such a way that they’ve got a sort of balance sheet and P&L statement on file for even the smallest tax payers. Think about it, various forms are used for assets and schedule a C is really just a pseudo P&L for small business owners.
How Does This Help the Renter?
Well, if you buy something, it gets capitalized as a business asset and the IRS tells you the depreciation expense that you’ll get from your income because of that asset. They tell you with this system. Rental fees are period business expenses that deduct from business income, in their entirety, as they occur and are paid. This isn’t to say that there aren’t tax benefits to a business owning assets. When the property meets section 179 requirements, a great amount of money (usually the entire cost) can be expensed up front. There is not only a general 179 limit but individual limits for asset types too. If an asset is over the de minimis amount, and not qualified for section 179, I would certainly rent the asset in lue of buying it.
Give Me Some Good Examples of Assets for Small Businesses to Rent
This is a good topic to end on. As one could probably imagine, the best examples are going to be electronics. Businesses require technology in both the service field and office environments. Consumer/Prosumer electronics (drones, cameras and etc…) are often over the de minimis amount and sometimes fall into categories that eliminates them from section 179 up front expenses.