In this blog, the Global Finance Group team will be explaining the ins-and-outs of depreciation as it applies to equipment leasing and our clients.
Depreciation refers to the general devaluing of a product due to its depletion over extended periods of time. In the world of equipment financing and leasing, product depreciation can prove positive to vendors/ owners leasing their products and customers buying products through leasing. The majority of leased equipment can be categorized as capital assets, which are products that can be leased for longer than a fiscal year. Depreciation on capital assets can be listed as a tax deduction for property owners (listing the depreciation as an expense on the company’s income statement) as well as individuals presuming title at the end of the leasing agreement (as seen in the Section 179 of the tax code).
When analyzing depreciation, it is important to understand the specific terms used by the IRS to define depreciation and its conditions.The IRS defines the basis of a product as the original purchase price of the product (including sales tax, freight, and installation) and class life as the “number of years over which an asset can be depreciated”. Depreciation allows owners to deduct the devaluing of their capital asset from the basis of the product over a given class life. The IRS uses the term “placed in service” to refer to the period when a capital asset has begun depreciating. It is important to note that a product is “in service” starting when the product can be used by your company and not when your company begins to use that product. Remember: As soon as the price tag is “ripped,” depreciation begins.
So when can you depreciate a capital asset?
A capital asset can be depreciated for the length of its class life. Most capital assets have a traditional depreciation schedule which details the product’s lifespan (aka class life) and extent to which it can be used as a tax deduction.
When considering deducting via leasing, we suggest partnering with a local CPA who is knowledgeable about Section 179 and the benefits of depreciation in leasing.
It is important to have a strong grasp on depreciation when looking to lease your own equipment or to buy equipment through leasing. Understanding depreciation allows companies to benefit from their purchases and account for the wear and tear that results from years of use of their particular asset.
Above is a basic summary of depreciation in regards to equipment financing. For more specific information, be sure to read the IRS’s Depreciation: Frequently Asked Questions or contact your local Global Finance Group representative with questions.