Taxation of leases that are not long funding leases: tax advantages: continued attraction of leasing
Although finance leasing does not allow off balance sheet financing it is attractive for two main reasons
- First, there is the industry’s argument that a lessor who owns an asset is financially more secure than a mere lender. Lessors are therefore more prepared to lend to less solid businesses and, perhaps, to lend cheaper than ordinary lenders (even leaving aside tax considerations).
- Second, finance leasing has been able to provide cash-flow timing gains over a loan, particularly when the lessee is tax exempt or ‘tax exhausted’ (that is, has no current tax liability because of losses, capital allowances etc). The rentals are reduced to reflect the timing advantages gained by the lessor from the capital allowances.
Operating leasing allows off balance sheet financing as well as providing the same two benefits as finance leasing.
However, in most cases an operating lessor faces more commercial risks than a finance lessor. In addition, of course, much operating leasing is unrelated to financing, merely making an asset available to a lessee for short period of the asset’s useful life.
Guidance on the tax benefits of operating leasing is at BLM31200.