Tag Archives: leasing

Why Companies with High Cash Reserves Still Choose to Lease

The affordability of equipment, technology and other hard assets can make or break a company’s growth. This is why leasing is so appealing to many businesses – acquiring these necessary items with a manageable monthly payment. But why then do established businesses with large cash reserves choose to lease, when they could just pay off the asset and avoid the interest? It turns out that there are quite a few benefits to financing for all types of organizations, from start-ups to Fortune 100s alike.

Tax Benefits
Leasing allows your customers to deduct monthly lease payments on a true lease as an operating expense. Depending on the lease structure and the accounting treatment, this means their lease may qualify for off-balance sheet treatment, which may assist them in acquiring the equipment they need while maintaining compliance with bank and loan covenants, staying within capital budget constraints, improving their financial position.

Another set of tax benefits many organizations take advantages of are Section 179, bonus depreciation and qualified leasehold improvements. With Section 179, the IRS allows for the project cost to be fully deductible if your business uses the leased equipment and lease payments pay the cost over time. Interest as part of the payments is also deductible.

Bonus depreciation is the provision that allows businesses to expense off a portion of an asset in the year it is added. This has proven to be very helpful for businesses with large amounts of qualifying equipment, as they are able to save large amounts of tax in the year of purchase. With a gradual depreciation phase-down in place, production equipment and improvement purchases with less than 20 year lives will be able to be expensed at 50% of the asset price in the year of purchase through 2017, 40% in 2018, and 30% in 2019.

Qualified leasehold improvements allow depreciation lives to be reduced to 15 years, instead of the 39 year schedules normally applied. This means that after Section 179 and bonus depreciation deductions, a business will be able to accelerate remaining tax value of improvements over 15 years instead of 39 years. This rapidly reduces the timeframe in which a business can depreciate an asset and enjoy the tax benefits more quickly.

Cash on Hand
It is hard to think of a scenario in which a business having a solid cash reserve would be a bad thing. As any business owner will attest to, having liquid capital to fall back on is always a good idea, especially when one considers the multitude of issues that may arise in a given day. While many businesses have the ability to pay for the equipment and other hard assets up-front, they would rather not deplete their cash or working capital capabilities. And with the ability to put little to no money down in order to acquire an asset, businesses are able to continue their workflow without disruption from an extended waiting period.

Fixed Monthly Payment
Knowing that a fixed cost is on the horizon can actually be a relief to a business. One of the most difficult things about expense accounting month-to-month is factoring in the new, surprise costs that pop-up. That is why even when they are able to pay the full cost up-front, many businesses opt for monthly payments since they are expected costs that allow them to better manage their budgeting cycle.

Hedge of Technology
In an age when the next best thing may be available a month after you purchase the latest and greatest, there can be a fine line behind staying up to date and lagging far behind. This is one benefit that leasing can provide better than paying for assets outright. Depending on the structure of the financing agreement, many companies lease assets as a way to stay current with advancement, updates and new features on a regular basis. This usually proves easier than trying to sell the asset themselves at a loss, only have to turn around and buy something new at full-price.

Since leasing is a hedge against technology, many businesses choose operating leases wherein at the end of the lease term, they have the option to return the asset. If the then fair market value of the asset is less than the residual that the business assumed, they bear the loss but are protected from fair market value fluctuations. Also, if the lessee chooses to swap the asset for one of newer technology, then the existing lease can typically be terminated and a new lease initiated.

Equipment Leasing Industry to Grow in 2013

U.S. businesses and government agencies will finance more than $742 billion in equipment acquisitions in 2013, according to the U.S. Equipment Finance Market Study 2012-2013, released last month by the Equipment Leasing & Finance Foundation. The study, conducted by IHS, provides a comprehensive look at the size and expected growth of the U.S. equipment finance market.

According to the study, the equipment finance sector has emerged from the Great Recession with finance volumes at an all-time high, as a result of double-digit growth in equipment investment and a favorable interest rate environment.

Seventy-two percent of companies use some form of financing when acquiring equipment, including loans, leases and lines of credit (excluding credit cards). Companies with less than $1 million in revenues use financing in 49 percent of their equipment acquisitions, while companies with revenues between $25 million and $100 million use financing in 86 percent of their acquisitions.

Even with the relatively high degree of uncertainty over the economy and regulations/fiscal policy, nearly 30 percent of companies surveyed anticipated increasing their equipment investment over the next 12 months.

Read more.

Tax Relief Act of 2010 Ending Soon

We have had an exciting time here in the leasing industry this year. There is a lot of excitement about potential growth of the economy in 2012. One thing that we wanted to make sure that everyone knew about for 2011 was the Tax Relief Act of 2010 which expires December 31, 2011. Under the Section 179 Deduction provision you are allowed to expense up to $500,000 as a deduction as opposed to the $250,000 normally allowed.  This deduction is allowed as long as you do not have purchases expensed over $2,000,000. Both new and used equipment are eligible for this deduction.

There is also a Bonus Depreciation incentive available until the end of 2011. This allows you to write off  100% for capital expenditures and depreciable property. This incentive only applies to new equipment. In order to qualify for 100% depreciation, the equipment must be delivered by December 31, 2011.

Have a question on how to maximize your savings using this provision? Go to the Section 179 website at

http://www.section179.org/.

Equipment Leasing and Financing Association Conference

I just returned from the 50th Annual convention of the Equipment Leasing and Financing Association (ELFA), which was held at the JW Marriott in San Antonio, Texas. There were nearly 1,000 attendees, up significantly from previous years.

The general mood at the convention was very upbeat, both in terms of the improving economy, but more importantly, the state of the Equipment Leasing Industry. The feeling is that businesses are returning to the mindset of having to acquire business assets, after scaling back purchases for the last few years. Since they have survived some difficult economic times, where “cash is king”, the option of acquiring new equipment, and paying for it monthly, rather than having a large cash outlay, looks extremely attractive to them.

Another topic of discussion centered around the opportunities available for Independent Lessors, as opposed to Banks and Bank Lessors. This was especially interesting to me, as DFI is an independent lessor. With the numerous regulatory issues confronting banks, independent lessors should be better positioned to react to the specific needs of their lessee customer and prospect base, while not having to deal with these regulatory issues, at the higher levels of the company. This is an exciting time for the leasing business.