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 categories.

 

Economic Considerations

  • 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.

 

Financial Reporting

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.

 

Convenience and Flexibility

  • 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?

 

Income Tax Considerations

  • Deductibility of Rentals
  • Alternative Minimum Tax

Lease 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.

 

Cash Management

  • 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 needs.