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Tax Lease or Non-Tax Lease When Financing Heavy Equipment

Posted On: January 24, 2023 author Paul Kendall

Making all of the best financial decisions in your business is a daunting responsibility, but it’s an important one. Do you go with Option A or Option B? Are you even aware of all the options available to you?

In many cases, a business owner may not know what all options are even available, but that’s just part of running a business, especially if you’re new or don’t have the connections to people who can help you learn more about what options are available.

Once you learn what options there are available to you, then you can start to evaluate the options, compare them to each other, and make a decision based on what you feel is best for your business.

Today we’re going to look at two different distinctions of a common type of financing: getting a tax lease or non-tax lease for financing heavy equipment. Picking out your heavy equipment loans or leases is an important part of the financing process and you want to make sure to take the time to understand both types.


What Is the Definition of a Tax Lease and Non-Tax Lease?

A tax lease (or operating lease), when looking for heavy equipment loans, is sometimes called a “true tax lease” or “true lease.” This is a financial arrangement, typically lasting multiple years, where all of the “risks and rewards” of equipment ownership is maintained by the lessor (owner). The lessee (you) gets to use the heavy equipment for the duration of the agreement while being able to write off 100% of the equipment lease payment as an expense.

A non-tax lease (or capital lease), in essence, is a type of financial arrangement that acts similar to a sales contract. In a $1 buy out lease, you own the equipment at the end of the lease for a $1. You can write the heavy equipment loans as an equipment financing agreement, the heavy equipment is transferred “as a loan” from the lessor (owner) to the lessee (you) at the beginning and you just pay it off monthly. At this point, the lessee (you) can claim the depreciation of the equipment when doing your taxes.


“They sound similar, so what’s the difference?”

When looking for heavy equipment loans, a tax lease and non-tax lease might sound similar. On the surface, they are. In both cases you have the option to write off “something” on your taxes.

The difference lies in the details, particularly what you actually get to write off.

For a true tax lease (true lease), ownership of the equipment or vehicle stays with the lessor and gains all of the major tax benefits of the vehicle. You, as the lessee, get to claim the entire “lease payment” on your taxes as an operating expense. When you hear of a Fair Market Value (FMV), what you’re essentially getting is a true tax lease or true lease.

On the other hand, a non-tax lease, you still get to “use” the heavy equipment. But all of the major tax benefits goes to you as the lessee as if you were the owner, rather than the lessor. This means that you’ll be able to claim depreciation of the heavy equipment associated with the lease. Unlike a true tax lease, you don’t get to write off the lease payment itself.

So, You can structure your heavy equipment leasing agreement as a FMV buy out and write off 100% of your payments off your taxable income.


When you structure your heavy equipment loans on an equipment financing agreement or on a $1 buy out lease agreement you get section 179 tax benefits, the deduction limit for Section 179 increases to $1,000,000 for 2018 and beyond. Plus 100% bonus depreciation up to $2,500,000

As you can see, picking out heavy equipment loans and lease options can get pretty complex once you start getting into the specifics.

But with the right help from experienced heavy equipment leasing companies, picking out the best heavy equipment loans, equipment leases, or equipment finance options can be easy.


Which Is the Better Option?

When it comes to financing heavy equipment loans, it still might be a little confusing whether you should go the “tax” or “non-tax” route. You get to write something off on your taxes either way, so which option do you go with?

It depends largely on your business and financial situation, so let’s get into the specifics to help you make a decision that relates to your current business.

When looking for heavy equipment loans, you’ll find that many of the most common types of leases are operating leases (true tax lease) due to the requirements needed for a lease to pass as a capital lease (non-tax lease).

When exploring the tax implications of each lease and heavy equipment loans in general, it’s worth considering where you lie in the tax bracket. Due to the way capital and operating leases are structured, there’s a higher value in opting for a capital lease (non-tax lease where you “own” the equipment), there are higher tax benefits for those who are in a higher tack bracket.

However, if you’re in a lower tax bracket, you’ll likely find better tax incentives by aiming for an operating lease (true tax lease).

Final Thoughts On Doing a Tax Lease or Non-Tax Lease When Financing Heavy Equipment

When making your decision to pick the best heavy equipment loans and leases and need to decide if you want a true tax lease (operating lease) or a non-tax lease (capital lease), you want to determine if you want to “own” the equipment or simply want to temporarily use the equipment.

If your goal is to eventually own the equipment, then going for a non-tax/capital lease would make more sense, as the structure of heavy equipment loans and tax benefits around these kinds of leases are suited for ownership.

If however you know that the equipment you’re trying to acquire is equipment that will eventually be replaced, upgraded, or passed on before the lifespan of the equipment, then a true-tax/operating lease would suit you better.

We recommend consulting with a tax or financial specialist who can help you through all of the fine details of both an operating and capital lease when shopping around for heavy equipment loans. There’s tremendous value in maximizing the benefits you get out of your chosen lease. The details might seem small on the surface when you’re just getting started.

But the longer you spend learning about tax and non-tax leases, the more you’ll realize that the difference between the two could either save or cost you a lot of money as a business owner.

What's the difference in monthly payments between a tax lease and non-tax lease?

Use our heavy equipment financing calculator  to calculate how much your heavy equipment financing payments could be and use our heavy equipment lease calculator to calculate how much heavy equipment you can afford to lease based on your monthly budget.

We invite you to contact Trust Capital today at 866-458-4777 for the lowest heavy equipment financing rates and to learn more about heavy equipment loans and we’ll help you figure out whether or not a true tax lease or non-tax lease is best suited for your business! Heavy equipment loans and leases can be the key you need to launch your business or take it to the next level. We even have heavy equipment leasing bad credit solutions. 

Let us help you get a better understanding of heavy equipment loans and the various financing options available to you for financing heavy equipment.

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