How to Hedge with a Futures Contract – Benefits of a Tax Oriented Lease



How to Hedge with a Futures Contract

A futures contract is a type of forward contract. A forward contract is an agreement between two parties that an asset or product will be sold in the future for a price agreed on in the present, by both parties. It is a legally binding agreement.

With a futures contract the gains and losses with money for technology, health, food imports and otherĀ  necessities are not realized only on the settlement date. With a futures contract, the gains and losses are realized every day. A broker credits or debits the gains or losses for each day.

This feature of futures contracts-daily resettlement-is known as marking-to-market and it significantly reduces the risk inherently involved in this type of contract.

Pension Funds and Taxes

Pension Funds and Taxes https://upload.wikimedia.org/wikipedia/en/f/fa/Stacks_of_money.jpg

Benefits of a Tax Oriented Lease

A lease is an arrangement. People lease various things. For example, cars, land or business places. A lease offers the benefits of use without ownership.

A lease also offers some of the security of ownership without the instability of renting. This in turn positively affects the overall stability of a business.

Firms throughout the United Kingdom lease cars for their employees instead of buying. They get cars that are new, thus saving on the cost of replacing parts.

Some people also do what is known as sale and leaseback, where in order to obtain funds, they benefit because they get cars that are new and therefore save on the cost of replacing parts. An asset which but then immediately lease it so that it continues to be available for their use. They receive cash from the sale which they can use for some other purpose, while being able to continue using the asset.

For tax purposes, a lease can be beneficial if the two parties involved in the lease are in different tax positions. Individuals and businesses which are in a low tax bracket cannot benefit as much from depreciation and debt financing as individuals or businesses in a higher tax bracket.

For businesses, lease payments are fully tax deductible, once it can be established that making these payments the lease is for business purposes and not merely to facilitate tax avoidance. The party which owns the asset may benefit from leasing in one of the following ways. If the item being leased is machinery, or anything else which is subject to depreciation, the party which owns it can depreciate it for tax purposes.


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