How Equipment Financing Works

Learn what you can finance and how Key Equipment Finance can help

Using financing to acquire business assets may affect your accounting procedures and the taxes you owe. Equipment leases and loans can provide benefits that may help a company's efficiency.

What equipment can you finance?

Practically any type of equipment that generates income or saves time and labor can be financed, and for equipment that is less than 90 days old, you can convert a recent purchase to an equipment lease. Sample finance assets include:

  • IT equipment and software
  • Manufacturing and industrial equipment
  • Specialty commercial and municipal vehicles
  • Energy efficiency equipment
  • Food and beverage equipment
  • Corporate aircraft
  • Medical equipment

What equipment finance option is best for my tax situation?

Tax Reporting Leasing Products

In classifying the lease as a tax or non-tax equipment lease, the IRS looks at the risks and rewards of equipment ownership. The IRS seeks to determine whether the lease agreement is a tax or non-tax equipment lease based on the apparent intent of the lessee and the lessor at the beginning of the term.

Tax Lease

In a tax lease, the lessor is the owner of the equipment for federal income tax purposes. The lessor receives the right to the tax benefits of ownership, including depreciation and any tax credits. The lessee also receives a tax benefit by being allowed to claim the entire equipment lease payment as a business expense, thus lowering the business’s taxable income.

Non-Tax Lease

With a non-tax lease, the IRS treats the equipment lease as if it were a purchase or loan for tax purposes. In this case, the lessee receives the tax benefit of ownership, including depreciation.

Learn more about equipment financing options

Financial Reporting Leasing Products

Financial reporting refers to the accounting presentation of equipment leases in the financial statements of lessors and lessees. Financial reporting is strictly defined by rules of the Financial Accounting Standards Board (FASB). For financial reporting purposes, an equipment lease is classified as either a capital lease or an operating lease.

Capital Lease

The FASB classification of a lease is based upon whether it looks like the lessee is purchasing the equipment or only using it. According to FASB criteria, if the basis of the transaction is a purchase of equipment in the form of an equipment lease, it is called a capital lease. The lease is considered a capital lease if the lessee intends to:

  • Acquire the asset
  • Use the asset for most of its useful life
  • Pay a significant portion of its cost during the lease term

A capital lease is treated the same as a purchase, and the equipment is shown as an asset and a liability on the lessee's business balance sheet.

Operating Lease

If a lessee does not acquire the asset, does not use the asset for most of its useful life, or does not pay a significant portion of its cost during the lease term, the FASB considers this type of funding agreement an operating lease. As always, Key encourages you to consult your tax advisor before entering any financing agreement.

As a longtime member of the Equipment Leasing and Finance Association (ELFA), Key encourages you to learn more about financing by visiting the Equipment Finance Advantage web site hosted by the ELFA.