There are three common ways to finance machinery but only one will deliver a tax deduction for the full amount of the monthly payment.
Commercial Hire Purchase (CHP) and Chattel Mortgage will typically only deliver a tax deduction of 55 cents to 65 cents for every $1 you spend in the monthly finance payments you make.
To put this in more clear terms, when you finance $100,000 over a five year term you will spend around $115,000 including interest.
Of that $115,000, you will typically only be able to claim around $65,000 to $75,000 in deductions through the claiming of interest and depreciation. The remaining $40,000-$50,000 will usually be claimed over another five years.
Although you do ultimately obtain the deduction over the longer term, your cash outflow has not provided $ for $ deduction in those initial five years.
You can achieve an equal deduction to the amount spent by simply using a finance lease as the debt structure to pay off the machine.
Under a finance lease (provided the structure is appropriate), you will receive equal to the monthly payment you have made.
To be clear here, this is a finance lease and not an operating lease and as such will provide you with ultimate ownership of the machine once the debt is cleared (similar to CHP or Chattel Mortgage).
As most companies finance their machines as a matter of course, a little time spent in obtaining the right structure can save those companies significant $ through the right tax effective structure.
– Mark O’Donoghue, CEO & Founder of Finlease.