There are some advantages of renting and leasing, and they have different fiscal effects depending on how you handle them. Here are the advantages, differences, and fiscal effects of renting and leasing.
Renting
The fees paid are only reflected in the profit and loss account for the amount of the installments. But they will not be visible in the company’s balance sheet since it does not appear as an asset of the company.
They are operations subject to VAT and like financial leasing. Only payments are posted to the company’s income statement are 100% deductible for corporate tax purposes.
The landlord/owner will be responsible for the repayment of the property. Depending on whether or not it has an option to purchase, the taxation of the operation will be determined. In case of not offering the possibility, the fees are fiscally deductible expenses.
On the other hand, if there is a purchase option, the deductibility of the fee will depend on whether or not there is reasonable doubt that the option is executed. But, in general, renting operations do not usually include a purchase option, so it allows the use of rapidly depreciating goods without any fiscal limitation.
Financial Leasing
The interest on the lease is 100% deductible, so all the amounts paid in interest will have to be recorded in the income statement during the year.
The part of the paid installments that corresponds to the recovery of the asset’s cost will be considered tax-deductible. According to the official amortization tables, it does not exceed double or triple (for SMEs) the maximum coefficient of linear repayment of the goods. This happens in all cases except if the leased assets are not depreciable such as land or plots.
The accounting amortization will be made based on its useful life, and fiscally it will be double its maximum coefficient during the first years and reversing these amortizations in the future. This implies deferring the payment to subsequent exercises. It will appear in the profit and loss statement as for financial expenses, which is the amount that will be reduced by the amortized amount each year.
Of the annual fee, one part corresponds to interest for the amount financed. These two amounts will appear in the profit and loss account and the balance sheet as accumulated Amortization. In this way, taxes to be paid will be reduced since the benefits obtained appear before taxes.
To capitalize on assets, it is often advisable to use leasing. This increases the value of the asset, net worth, and liabilities of the company.
The tax advantage of leasing is that a liability account can be opened for “deferred tax” for an amount equal to the depreciation allowance for the year. In this way, the amount in corporate tax is postponed and will be paid in future periods.
Why Is Leasing A Good Financing Method for Freelancers, SMEs, Startups, and Entrepreneurs?
When a large initial investment of tangible assets is needed, it is advisable, but the necessary financial resources for its acquisition are not available.
The goods that are usually financed are:
- Furniture.
- Vehicles.
- Computer or technological equipment.
- Machinery.
Main advantages:
- It allows SMEs and freelancers to obtain goods that entail a high investment without making a large initial outlay, as would be the case of the purchase.
- It is 100% fundable.
- In addition, we can prove the good during the leasing period by not having made the purchase. If this does not meet our needs, you can change it or, on the contrary, pay the current residual value.
- It is a way to maintain the option to update those assets when necessary without losing all the initial outlay or the entry of a loan.
- Their conditions are usually flexible and adaptable to the client.
- The deductions and deductions that can be made are 100%, except in cases of real estate.
- Its amortization can be accelerated, unlike rents, and thus pay fewer taxes during the first years.
Factors to consider if you are going to choose this method of financing:
- In many cases in which the tenant ends up not acquiring the property. If you are clear that you will not be interested in your final purchase from the initial moment, it is better to opt for renting. With this method, you will have lower lease installments.
- Study the components of the quota carefully. At the cost of recovery that forms the basis of the fee, you must add the interest and the possibility of including the risk premium.
- You should also consider the minimum period of the contract and the associated clauses as product reviews, penalties in case of non-compliance, etc.
- If the tax advantages (deductions and accelerated depreciation) are the main reason we opt for this type of financing, it is better to study well if it suits us.
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