Equipment Leasing: Part 1 Ownership And Keeping Current With Technology

Equipment Leasing: Part 1 Ownership and Keeping Current with Technology

by

Walker Wild

Leasing provides an alternative to equipment purchase. Almost any type of equipment can be leased; electronic equipment like computers, fax and photocopy machines, manufacturing machinery, vehicles, healthcare equipment and heavy equipment including bulldozers, excavators and paving machines.

According to an article in the Business Owner’s Toolkit the following are some of the advantages of equipment leasing. Reduced initial cash outlay. The main advantage of leasing is that you can generally gain the use of an asset with less of an initial cash expenditure than would be required if you purchased it. Equipment leases rarely require down payments. Easier credit terms. You’ll likely have an easier time finding someone willing to lease you equipment than finding someone willing to extend you credit to purchase the equipment. One reason is that with a lease, title to the property remains with the lessor so if you miss some payments, the lessor can quickly get the equipment back. Furthermore, under a lease you may be able to negotiate a longer payment period (resulting in reduced payment amounts) and/or a more flexible payment schedule (resulting in a better matching of your payment obligations with your cash flow) than you would be able to negotiate under a loan. Avoidance of financial restrictions. An equipment lease rarely includes any provisions that restrict your future financial operations. In contrast, it is not uncommon for a loan agreement to include restrictions on your ability to acquire additional equipment or to borrow additional funds without the lender’s permission. Flexibility in addressing obsolescence. Leasing may enable you to better keep pace with improving technology. For computers, communications devices, and other equipment that is subject to rapid technological improvement, you’ll have an easier time convincing yourself to invest in updated equipment if you acquired your existing equipment under a short-term lease or a lease that includes an equipment substitution provision. Flexibility in addressing need and suitability. If you’re not sure whether you really need a particular item of equipment, leasing an item on a short-term basis will provide you the opportunity to evaluate the item’s utility to your business without committing to a substantial investment. You can also use short-term leases as a way to test and compare different brands and models. Maintenance support. Under some leases the lessor may agree to be responsible for maintaining and repairing the leased equipment. Although the cost of this service will usually be factored into your rental payments, you’ll at least avoid the problems of having to find qualified repair persons and of being burdened with unplanned repair costs. Furthermore, a responsive lessor who is familiar with the equipment being leased can significantly reduce your equipment’s downtime when repairs are necessary. Current deductibility of rent. Assuming that the IRS doesn’t recharacterize your lease as a purchase for tax purposes, leasing provides a potential tax advantage in that your lease or rental payments are fully deductible if you use the leased asset in your business. In considering whether leasing will provide an actual tax advantage, however, you need to weigh the corresponding disadvantage of being denied any depreciation deductions with respect to the leased property. Some additional considerations for leasing equipment include: Sales/Use Tax Deferral. The purchase of equipment may require the payment of sales tax at the time of purchase. In most cases with equipment leasing sales/use tax is paid over time as the equipment is used resulting in a potentially significant cash savings the first year of the lease. Preserving Lines of Credit. A lease preserves bank lines of credit for use as working capital, meeting fluctuating sales or seasonal sales cycles or emergencies. Inflation Hedge: Cash outlays are deferred with equipment leasing as compared to a purchase. Inflation lessens the cost of future lease payments because the payments are made with cheaper dollars which reduces the cost of financing in real dollars. Equipment Disposal: At the end of a lease, equipment can be returned to the leasing company and the cost of disposal or recycling is avoided. Leasing is an alternative to purchasing equipment and has many advantages. It is recommended that a company consult with their accountant and tax advisor to understand the financial impacts of leasing and have a lawyer review the leasing contract to ensure the terms and conditions meet the company’s needs.

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