Commercial equipment leasing and financing is a valuable alternative for growing businesses.
According to the U.S. Dept of Commerce, 80% of U.S. companies lease some or all of their equipment
and technology. In 2010 alone, annual leasing combined in the United States exceeded $625 billion,
which equated to over 55% of all capital investments in equipment.
For years, many business people have realized the use of equipment is
far more important to the production of income than a piece of paper conveying title to
the system. It is the use of the system that produces profit, not the ownership.
We can cite many good reasons to finance your acquisition of computer technology
through a leasing plan. These reasons usually fall into several of the following
- Diversification of Financing Sources
- Additional Source of Financing
It is important to note that federally chartered banks have, by regulatory law,
built-in limits on the availability of loanable funds to any single customer.
Diversification of financing sources makes good business sense whether credit is in short
supply or not.
During periods when bank financing is generally available, it is conceivable a
business, for a variety of reasons, may fall out of favor with its primary, or only bank,
and not be able to borrow additional funds. Fortunately, leasing may provide an additional
source of financing when conventional financing is not obtainable.
A lease classified as an operating lease for the lessee's
financial reporting purposes is not required to be capitalized in the financial
statements. Many - if not all - of your balance sheet ratios and measurements will be
improved. Your financial position will be stronger, more liquid, and more profitable.
An operating lease could have a more favorable impact on a lessee's income statement in
the early years of the lease. Initially, the operating lease expense could be less than
the depreciation and interest expense for a loan or a capital lease, thus potentially boosting the lessee's overall reported earnings.
Because it lowers your asset base and increases your reported earnings, an operating
lease helps you to report a higher return on assets (ROA). Most companies are constantly
striving to have their financial position look as strong and healthy as possible to
shareholders and lenders.
Of course, Corporate Micro Systems cannot offer tax, accounting or legal advice. The
actual financial implications of any transaction needs to be reviewed and approved by the
appropriate processes within your company.
- Less Red Tape
- Bundled Services
- Planned Replacement of Equipment
Acquiring the use of computer technology through a lease can
involve less red tape and time than conventional financing. Operating leases require much less bookkeeping than outright purchases.
Leases are usually written for the use of tangible personal property. Other products
and services, though, can be bundled with the lease to offer a total-protection or
full-service lease. Very often this is less expensive and more convenient than if you were
to purchase the same services separately.
Business needs are constantly changing and the features of computer systems are
constantly expanding. Leasing makes more sense in a fast-paced business environment
because it allows you to update your computer operations in a managed, strategic fashion.
Why have your competitive computing capabilities side-tracked by depreciation schedules?
- Deductibility of Rentals
- Alternative Minimum Tax
payments in a tax lease are fully deductible for federal income tax purposes. While the lessee, as
user, not owner, will not receive any accelerated depreciation benefits, the deductibility of lease payments provides a clear tax benefit to
you the lessee.
If your company is in or approaching an Alternative Minimum Tax (AMT) position, it
makes more sense to lease your computer equipment. A purchase may cause you to pay
additional taxes under AMT due to accelerated depreciation whereas a lease will not. In
addition, a company that is in need of new equipment in the fourth quarter of its fiscal
year may fall subject to the mid-quarter depreciation convention through purchasing the
equipment. This aspect of tax law lessens the overall first-year depreciation benefits for
all personal property placed in service that year. A company with system-acquisition needs
in its fourth quarter that is also facing the possibility of triggering their mid-quarter
convention should choose to lease. That is because leasing and leased assets have no
bearing or effect on the rules governing the application of this depreciation convention.
- Affordability to Lessees
- Improved Cash Forecasting
- Circumventing Capital Budget Constraints
- Reimbursement Policies
The lease alternative requires little upfront cash expenditure. Our typical lease is
written with the first two payments due upon acceptance of the computer system as compared
to the typical bank loan structured with a 10 to 20 percent down payment. Other issues to
consider are the incidental expenses of acquiring a computer system. Items such as sales
taxes, installation fees, and software can be included in the lease. This may not be
possible with a banking arrangement.
The fixed contractual nature of the lease relationship eliminates any uncertainties
regarding the future cost of the computer system. This enables companies to prepare more
accurate cash forecasts and plans. In addition, end-of-lease options (purchase, renew, or
return) can be addressed in a more enlightened fashion.
If a department or division already has utilized fully its budgeted amount of capital,
it most likely will not be allowed to purchase additional computer equipment. On the other
hand, the department or division could lease the needed equipment and pay for the lease
rentals out of its operating, instead of the capital, budget.
Firms operating in certain regulated industries, and private contractors for the
federal government, are reimbursed in various ways for the expenses they have incurred,
depending upon the nature of the expense. Often lease expenses can be recovered more
quickly than depreciation and interest expense incurred in purchasing an asset.
CMS believes the information in this publication is accurate as of its publication
date; such information is subject to change without notice.
CMS is not responsible for any inadvertent errors.
You are urged to consult your own tax, accounting, and legal consultants with respect to
the applicability of the information contained in this publication to your particular