Anew provision in the tax laws might
change the way your company
looks at leasing versus purchasing.
The recently enacted provisions under
the Economic Stimulus Act of 2008 are
very similar to what was passed under
The Jobs and Growth Tax Relief Reconciliation Act of 2003.
The comprehensive package contains
some pro-growth elements, specifically
allowing businesses to accelerate depreciation deductions on their investment in
qualified property. Among other incentives, the provision allows for an additional first-year depreciation deduction
equal to 50 percent of the adjusted basis.
Smart Business spoke with Chris Bell
and Mark Zink, vice presidents in the
Equipment Financing and Leasing Group
at Fifth Third Bank, about what to expect
under the new law and how to determine
whether to lease or purchase.
How common is equipment lease financing
in today’s market?
Equipment leasing is a major means
that companies and municipalities of all
types and sizes employ to acquire equipment. The current economic landscape
has CFOs looking for creative ways to
fund equipment acquisitions and manage
capital budgets. A renewed focus is being
squarely placed on working capital and
increased liquidity. This sensitivity to capital value tends to enhance leasing as an
alternative to traditional debt financing.
Companies lease for many reasons, but
seldom exclusively, to avoid the capitalization of new equipment. The most common reasons for leasing are to match
cash flow to productive use of assets, to
avoid technological obsolescence (return
and upgrade), for 100 percent loan to
value financing, for efficient use of tax
incentives for acquiring new equipment,
to improve cash flow benefits and to
expand available credit.
How does a company’s tax status affect the
decision to lease or buy?
A company should look at its current
and future tax situation to determine the optimal structure. Taxpayers should optimize their current tax benefits and forecast against their minimum tax positions
in the future. Some companies may find
that they may not be able to immediately
utilize some or all of the tax benefits
resulting from purchasing equipment. A
tax lease will effectively transfer those
tax benefits to the lessor in exchange for
lower rental payments.
How do my long-term intentions with the
assets impact the decision to lease or buy?
It is important to consider your plans
for the acquired equipment up front.
Obviously, things may change over time,
but you should consider some of the following in advance: How long will I need
the equipment? Is technological obsolescence of the equipment a threat? Could
inflation threaten the future market
value of the equipment? What is the value
of cash savings from leasing to the company? Perform a lease-versus-buy analysis, which compares the after-tax cost of
ownership. The lessor can assist with
this analysis.
Are there certain organizations that qualify
for tax-exempt leases?
Each state has its own statutory guidelines for tax-exempt lease qualification.
Generally, political subdivisions, such as
counties, cities, villages, townships,
school districts and fire districts, fall
into this category. In contrast to other
traditional forms of tax-exempt financing (i.e. bonds and notes), leasing is subject to the lessee’s annual appropriation
and is thereby not typically considered a
general debt obligation.
In addition, some other not-for-profit
organizations, such as hospitals and private schools, can utilize tax-exempt leasing through the support of a local municipality. These entities typically utilize
this form of financing mainly for an
effective low-cost, tax-exempt solution
to finance assets over their economic
useful life.
Are there any intangible benefits to leasing?
Working with a leasing facility can be a
very positive experience for a company.
From an efficiency perspective, equipment lease lines of credit are often put in
place early in a company’s fiscal year to
manage capital expenditures. The facility may be structured so that deposits to
the equipment vendors may be funded
under the line on an interim basis and
then upon delivery, termed out into the
appropriate lease schedule. The fixed
rate form of lease financing provides an
ability to plan for future business needs
and is a predictable means of matching
revenue and expenses.
Are there asset classes that do not work
well in lease financing?
Virtually all types of equipment can be
leased with the main exception of limited- or special-use property. Under IRS
guidelines, property must be of use to
someone other than the lessee or a related party.
CHRIS BELL and MARK ZINK are vice presidents in the Equipment Financing and Leasing Group at Fifth Third Bank. Reach them at
[email protected] and [email protected], respectively.
