Capital Leases vs. Tax Rate

Why would a company in a high marginal tax bracket prefer a capital lease over an operating lease?

With a capital lease, you are making interest payments as well as principal. The interest payments are tax deductible.

The operating lease expenses are also tax deductible… the main reason is total expense in the early years of a capital lease is > than operating lease. interest expense+depreciation expense> operating expense in the first few years. later on once you have depreciated most of the asset this relationship reverses.

so since the expenses are higher you would want to have the capital lease so you will have to pay less taxes? Since most firms have 2 sets of balance sheets would this even make a difference?

Higher Dep + interest = lower NI and Higher CF. This will create DTL that will need to be paid off later years.

excellent thanks guys