Tax Benefits of Leasing

Timothy J. Bell

Quinnipiac University; University of Connecticut; Babson College

Jacob K. Thomas

Yale School of Management

May 1, 2013

Economics Letters, Forthcoming

Financial economists view the tax benefits of leasing as a complex function of the tax deductions and income associated with rentals, depreciation, and interest attributed to lessors and lessees facing different tax rates. We offer two ways to simplify that complexity using the concept of present value depreciation, which reflects the decline in an asset’s value (present value of remaining cash flows) over time. We rely on the insight in Samuelson (1964) that tax rates do not matter if depreciation allowed under tax rules equals present value depreciation. We show that tax benefits of leasing, between a high tax rate lessor and zero tax rate lessee, equal the present value of lessor tax shields on a) the difference between actual tax depreciation and tax-neutral depreciation implied by actual rentals, or b) interest expense associated with a “loan” from the lessor to the lessee created by deferring actual lease rents relative to tax-neutral rents implied by actual tax depreciation.

Number of Pages in PDF File: 11

Keywords: Tax Benefits, Leasing, Economic Depreciation

JEL Classification: G3

Accepted Paper Series

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Date posted: August 28, 2013  

Suggested Citation

Bell, Timothy J. and Thomas, Jacob K., Tax Benefits of Leasing (May 1, 2013). Economics Letters, Forthcoming. Available at SSRN: http://ssrn.com/abstract=2261201

Contact Information

Timothy J. Bell
Quinnipiac University ( email )
275 Mt. Carmel Avenue
Hamden, CT 06518
United States
University of Connecticut ( email )
Department of Political Science
Storrs, CT 06269-1063
United States
Babson College ( email )
Babson Park, MA 02457-0310
United States
Jacob Kandathil Thomas (Contact Author)
Yale School of Management ( email )
135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States
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