Advantages of Financing
While every business operates with different goals in mind, we here at Interstate Leasing want to make sure you have all the information to make the right decision whether to lease or buy equipment.
Leasing improves your company’s cash flow by letting you buy equipment immediately and still preserve your working capital. Most leases offer 100% financing with no downpayment; others furnish extended terms (up to 60 months) where bank loans are usually capped at 24 to 36 months. The longer the term, the lower the payments. In addition, a lease enables you to pay for equipment with the revenue it generates. Remember, it’s the use of the equipment – not the ownership – that generates profits!
Prevents out-dated equipment
When current technology becomes obsolete and is disposed of before it’s fully depreciated, you lose tax credits. With a lease, you can acquire or upgrade equipment with new time and money-saving technology and not be penalized.
Hedge your position
Not only can you lock in your costs, you can avoid the effects of inflation and the variable interest rates associated with conventional financing. And with a known, fixed payment for the term of a lease, budget figures are easier to project. Leasing also eases budget and administrative restraints and avoids loan covenant restrictions.
Capital Budget Limitations
Budgets are worked out in advance of the current fiscal year and are based on the previous year’s operations. If you’re given a capital equipment budget of $100,000.00….that’s all you’re allowed to purchase during the current year. Once that’s gone, you have to request any additional equipment in next years budget and wait for it to be approved. Most companies have funds available in their operating account and lease payments can be taken from here opening the doors to more equipment.
Deductibility of Rentals
Leasing maximizes tax advantages. While purchased equipment is depreciated over six to ten years or longer, lease payments are fully expensed over the term of the lease – generally two to five years. In addition, the IRS allows your lease payments to be fully deductible if your company uses the leased equipment. The Section 179 Tax Provisions lets companies deduct up to $500,000 of new and used business equipment approved by the IRS. Lease Payments are pre-tax expense, while cash is paid with after-tax dollars. An equipment purchase of $10,000, for example, requires earnings of approximately $15,000 in pre-tax revenue. A lease can also help you avoid Alternative Minimum Tax (AMT).
Use Versus Ownership
Quite simply put, it’s the use of the equipment that’s important, not the ownership. John Paul Getty said it best, “if it appreciates, buy it. If it depreciates, lease it.”
2010 Tax Savings Example – IRS Section 179 Deduction
|Cost of Equipment:||$300,000.00|
|1st Year Write Off (Max. $250K)||$250,000.00|
|50% Bonus Depreciation:||$25,000.00|
|Normal 1st Year Depreciation Deduction:||$5,000.00|
|Total First Year Deduction:||$280,000.00|
|Cash Savings on your Equipment Purchase @ 35% Tax Bracket:||$98,000.00|
|Lowered Cost of Equipment after Tax Savings||$202,000.00|