Business / Corporate Financing

EQUIPMENT FINANCING

Lease vs. Buy

What are the tax effects?

Explore important factors to consider when investing in new equipment for your business – factors that can impact your overall financial health.

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Comparing Your Options for Equipment Acquisitions

Obtaining the equipment necessary to grow and stay competitive continues to challenge mid-sized businesses. In the midst of fast-changing markets and ever-greater capital concerns, business growth poses a dilemma. Leading-edge technology, timeliness and scalability all play an important role in an organization’s assets.

However, there is no single, best answer to the question of how to pay for required equipment.

Equipment financing varies, though a customized structure can help you reach your financial objectives. For example, there are options to:

Optimize cash flow
Help you out of AMT
Maximize temporary tax incentives
Facilitate equipment replacement and upgrades

Credit Preservation

Test Your Knowledge

Financing equipment allows your organization to be nimble without depleting its capital reserves or bank lines of credit.

True

False

You're right, it's TRUE!

By acquiring the equipment you need immediately, your assets can generate revenue while you pay for them over time.

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Sorry, it's TRUE!

By acquiring the equipment you need immediately, your assets can generate revenue while you pay for them over time.

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Cash Flow

Flexible payment options can optimize your business cash flow, address seasonal requirements – and help keep your business competitive.

In addition, equipment financing options often involve little or no down payment.

Typical out-of-pocket costs such as software, delivery costs and training can be bundled into a single financing arrangement.

There are options that facilitate equipment replacement and upgrades.

Equipment Management

When the latest technology is important to your business, leasing may be the solution:

Enhanced flexibility

An equipment lease may offer mid-term upgrade and end-of-lease options, which both help you avoid the risk of owning obsolete equipment.

More Options

You may also have the opportunity to renew the lease, purchase the equipment, or return your assets at the end of the term.

Tax Savings

Test Your Knowledge

Not all equipment offers depreciation benefits.

True

False

That's not true, ALL equipment offers depreciation benefits.

For many businesses, asset depreciation plays an important role in fiscal management. Determining whether your company can effectively use all of that depreciation requires some consideration. This is especially true for equipment-intensive businesses.

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You're right! ALL equipment offers depreciation benefits.

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When deciding how to pay for new equipment, be sure to consider the impact on your organization’s income taxes.

Full taxpayers in need of the sheltering effect of equipment depreciation will typically benefit from tax ownership of equipment. This can be accomplished with a loan, installment payment agreement and some leases. All of these options allow the user to deduct depreciation and interest charges from taxable income.

Companies with a more complex tax situation may want to consider a tax lease. Tax leases effectively trade tax depreciation for lower payments. Plus, tax leases allow the entire lease payment to be deducted as an operating expense on the organization’s tax return. To determine the best option for your business, you should always consult your tax, legal or financial advisor before entering any equipment finance agreement.

Here is a high-level overview of factors to consider when you evaluate your options for equipment acquisition.

Alternative Minimum Tax (AMT)
Net Operating Losses / Tax Credits
Mid-Quarter Convention

Alternative Minimum Tax (AMT)

Corporations near to or already paying Alternative Minimum Taxes should beware of the implications of purchasing their assets. Such organizations cannot effectively use all the tax benefits associated with accelerated equipment depreciation. Consequently, they can experience an increase in the after-tax cost of acquiring an asset.

In contrast, a tax lease can minimize the creation of additional tax depreciation: The lessor records the equipment ownership and resulting depreciation. And because equipment leasing companies are able to more efficiently utilize the tax benefits associated with depreciation, the lessee can enjoy the savings in the form of lower monthly payments made to the lessor.

Consider a tax lease: It can minimize the creation of additional tax depreciation.

Net Operating Losses / Tax Credits

A lease agreement is also advantageous for corporations with expiring Net Operating Loss (NOL) carryforwards or other similar tax credits. Depreciation deductions on purchased equipment reduce taxable income, sometimes preventing a business from fully using its tax credits. Leasing allows you to maximize the use of the credits to lower your tax liability. In this manner, tax benefits are passed on to the customer in the form of lower payments.

Leasing may allow you to maximize the use of the credits to lower your tax liability.

Mid-Quarter Convention

The mid-quarter convention states that if a company acquires more than 40% of its assets during the fourth quarter, it must recalculate its depreciation expense using the mid-quarter convention tables. Most companies attempt to avoid the mid-quarter convention by closely managing the amount of assets they purchase (and place in service) during the fourth quarter.

A tax lease can allow you to assign ownership to the lessor, and potentially avoid triggering the mid-quarter convention rule for other capital investments made by your business during the year. Leasing can be a helpful option when project delays or unexpected equipment replacement needs arise in the fourth quarter.

Leasing allows your company the freedom to purchase the equipment it needs, when it’s needed.

Summary: Weighing the Benefits

Key Takeaways

Remember that equipment financing can be used as a strategic tool.

It lets you acquire and employ assets immediately and develop a plan to achieve long-term goals.

Whether your company’s objective is to enhance cash flow or optimize tax savings—or both—an in-depth analysis of your equipment is necessary.

Assessing your current and future asset needs in the form of a Lease vs. Buy Analysis will help determine whether a lease or loan is the best alternative.

To develop the most profitable acquisition strategy, consult with an equipment financing expert.

In particular, seek someone with a background in lease structuring and industry expertise – as well as an understanding of your unique business goals.

Learn More About Equipment Financing

Visit

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or contact your KeyBank Sales Representative.