Operating Leases on Your Cash Flow

by Carol Deeb

Operating leases are an expense to a company. However, there are advantages to leasing, especially if you don't have an abundance of available cash. Because there is no large outlay in the beginning, you pay only for the lease and the upkeep of the asset. Leases are beneficial for short-term use. If your industry utilizes changing technology, then switching your leased equipment after a few years is less expensive than purchasing it. Also, you might be able to take a tax deduction for your operating leases on your business return. Understanding how to report operating leases on your cash flow statement is important to determining the financial health of your company.

1. Confirm that the lease is an operating expense and not a capital expense. The term of the lease cannot be longer than 75 percent of the life of the equipment. Ensure that the asset being leased is not owned by you at the end of the contract, and that you can't buy it at a steep discount at that time. The lease payments should not be more than 90 percent of the worth of the equipment.

2. Know the various types of operating leases held by your company. You can have lease agreements for items such as your building space, vehicles, office equipment or manufacturing machinery.

3. Add up all operating lease payments that you make every month. These will not be listed separately on your cash flow statement, but as one entry under "rental leases" or "rent expense."

4. Add your total operating expenses, such as staff and marketing, in addition to the operating lease costs. Subtract the amount from your total income, which includes sales and customer financing. The result is your cash flow.

5. Take the annual tax deduction for your total operating lease expenses. This increases your yearly cash flow by the amount that your overall tax burden is reduced.

About the Author

Carol Deeb has been an editor and writer since 1988. Her work has appeared in magazines, newspapers and online publications, as well as a book on education. Deeb is a real-estate investor and business owner with professional experience in human resources. She holds a Bachelor of Arts in English from San Diego State University.

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