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Financial Leasing and Tax Considerations for Real Estate Investors

Leasing is a fundamental and common expense to exercise any activity which is considered a deductible expense as soon as it is related to the activity and supported by documentation, and it is used to extend tools for business finance, that provide advantages to either acquire assets And buildings without the need to obtain loans or issue treasury bonds  This faces tax implications which must be observed as follows:

Operating Leases

For Lessors:

ItemsTax Treatment
Operating revenueIncluded in taxable income
Interest revenueIncluded in taxable income
Included in taxable incomeConsidered as a deductible expense

For Lessees:

ItemsTax Treatment
Amortization of assets of usufructNon – deductible
Interest expensesNon – deductible
Lease expensesAllowed to deduct amount paid each year

Finance Leases

For Lessors:

ItemsTax Treatment
Finance revenueIncluded in taxable income (amount received each year)
Cost of financeFully deductible (as a core activity)
Interest expensesFully deductible (no limitation)
Provisions of financeDeductible is limited to certain condition
Bad debtLimitation on deductible
Stamp taxConsidered as a deductible expense
WHTDoesn’t applicable

For Lessees:

ItemsTax Treatment
Amortization of the Right to use.
(lease contracts)
 Considered as a deductible expense
Interest expenses Considered as a deductible expense

A controversial issue that may arise concerns the most advantageous method for stakeholders to purchase buildings from a tax perspective. The options include obtaining loans, issuing treasury bonds, or taking out a mortgage.

Conclusion

Leases can significantly impact taxation for both lessors and lessees, influencing cash flows, profitability, and financial reporting. It’s essential for individuals and businesses engaged in leasing activities to carefully consider the tax implications and seek professional advice to optimize tax strategies and ensure compliance with applicable regulations. By understanding the nuances of lease taxation, stakeholders can make informed decisions to effectively manage their tax liabilities and enhance overall financial performance.

To find out more, please fill out the form or email us at: info@eg.Andersen.com

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Written By

Mohamed Shaaban - Senior Tax

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