What is an operating lease?
The main distinguishing feature of an operating lease is the issue of ownership of the leased asset. If an entrepreneur takes an object under an operating lease, the lessor (that is, the leasing company or bank) remains the owner of the object (e.g., a car), and it is therefore included among the lessor’s assets.
What does this mean in practice? The owner of the object will be required to make depreciation deductions on it, while the lessee – in this role, the entrepreneur – will be able to recognize the operating lease installment and the initial payment, if any, as a deductible expense. What’s more, also any repairs, replacement of parts, etc. are tax-deductible for the entrepreneur in an operating lease – so he will be able to reduce the amount of income tax to be paid.
EXAMPLE
Ms. Teresa has been running a small café for several years. It decided to expand its offerings and also engage in small-scale artisanal ice cream production. As the prices of ice cream machines, freezers and other instruments, are too high, she decided to lease the equipment on an operating basis. She included the initial fee of PLN 1,000 in deductible expenses, as well as the monthly installments of PLN 387 net. However, it cannot depreciate the leased items, as the lessor remains the owner.
Operating leases – summary
Costs:
- Initial fee (also deductible);
- lease installments (id.);
- VAT forming part of the installment.
Operating Lease Agreement:
- duration of more than 40% of the item’s depreciation time;
- Redeemability dependent on contract term and depreciation rate.
Depreciation obligation:
- On the side of the lessor (bank or leasing company).
How does a finance lease work?
The most important difference between operating leases and finance leases is the issue of asset recognition. Items purchased through finance leases are counted as business assets. This entails – by analogy – the lessee having to make depreciation deductions.
However, this is not the end of the changes. In an operating lease, the entire lease payment was tax deductible for the entrepreneur, but a finance lease is governed by its own rules and allows only the interest portion of the lease payment to be included in the BUI.
The issue of payment of VAT is also different – it is then necessary to pay all the VAT upon receipt of the object of the lease agreement, along with the first installment. In contrast, there is no upfront fee in finance leases.
Important!
The entrepreneur becomes the full owner of the object immediately after paying the last installment of the financial lease
Financial leasing – summary
Costs:
- Depreciation allowances (included in deductible expenses);
- Finance lease installments (only the interest portion is deductible);
- VAT payable in full in advance.
Finance lease agreement:
- Duration of more than 12 months;
- Payment of the last installment of a finance lease automatically grants ownership to the lessee.
Depreciation obligation:
- On the part of the lessee (the user of the object).
Leased car – what is worth knowing?
Undisputedly, the most commonly leased type of items are vehicles, and more specifically, passenger cars. If you, too, are considering leasing a car, check out what you need to know before signing a contract that binds you for several years.
What is a mixed-mode lease?
The current regulations on vehicle leasing costs take effect in 2019, and force entrepreneurs to declare whether the leased car will be used 100% for business, or to some extent as a means of personal transportation.
This delineation is especially true for sole proprietorships, where an entrepreneur may wish to purchase a car not only to commute to customers and perform business-related activities, but intends to use the same vehicle to go shopping or visit family.
This declaration determines how to account for lease installments and all other costs incurred in the operation of the car (VAT, invoices for fuel, repairs, maintenance, replacement of parts, etc.).
If you choose to use the car in a mixed mode, you will only deduct 50% of the VAT that is part of the lease installment (in the case of an operating lease), and you will deduct 75% of the remaining costs. However, if the vehicle will only be used for business, we can deduct 100% of all costs without any obstacles. An important condition for such billing, however, is to keep detailed records of kilometers traveled for the purpose of a possible audit regarding the proper payment of VAT.
Important!
A very important restriction on leasing a car is the provision, introduced in 2019, that an entrepreneur can include installments up to a maximum of PLN 150,000 in vehicle value as a deductible expense.
These conditions also apply to finance leases, in which case the maximum value of deductible depreciation is PLN 150,000. The purpose of this provision was to restrict entrepreneurs from accounting for luxury, very expensive cars – the goal of this practice was often to achieve tax optimization.
So which is more beneficial? Comparison of operating leases and finance leases
The fact that operating leases are most often used by new companies and entrepreneurs, for whom it is crucial to be able to make a small contribution (even from 0%!) and to spread the entire cost in installments. Finance leases, on the other hand, require payment of all VAT at once, but allow the lessee to depreciate the object and make smaller installments over the life of the contract.
