Equipment Leasing- A Viable Option in These Turbulent Times
In today’s turbulent economic conditions, many business owners find themselves with short cash positions and a continuing reluctance to commit to the new expense of adding or replacing equipment. Even though, this may be exactly the right time to replace equipment do to some great deals, the lack of fiscal resources may preclude a business owner from “making a big jump” and spending large sums of money.
A viable option in today’s economic climate is to lease new equipment to allow your business to remain cost competitive and possibly, reduce labor costs and increase organizational efficiency.
A Fair Market Value (FMV) lease is an equipment lease that establishes portion of equipment purchase value as a “residual” payment at the end of the lease term. This residual is typically 10-20% of the purchase value. At the end of the lease term, the lessee has three options:
A. Return the equipment to the lessor and potentially replace/upgrade with new equipment
B. Pay the residual amount and receive full ownership title to the equipment
C. Refinance the residual amount into a monthly payment structure, with ownership transfer at time of payment completion.
The Internal Revenue Service typically views an operating lease as a “rental” (since the payment structure is not based on full equipment value), 100% of your lease monthly payment can typically be written off as a business expense. Check with accountant, attorney and tax professional for the exact circumstances of your case. We don’t provide any tax advice!!
Depending upon your particular business case, it may be more beneficial to take advantage of depreciation, as opposed to a monthly expense. Equipment leases can be structured as a finance, or capital, lease with a $1.00 residual payment at lease end. These leases are considered to be “financing”, so all of the benefits of ownership are available immediately.
OFFICE BALANCE SHEET TREATMENT
Your FMV lease payment may be treated as an operating expense on your financial statements. This approach does not increase your capital equipment purchases and add to your long term debt.
CASH FLOW
Leasing provides the flexibility to adjust the residual amount and the length of the lease term, allowing for payment structures that make sense to your business cash flow. Some new equipment may allow for business expansion, technology upgrading or production capacity increases which may increase cash flow. With affordable payment structures and the ability to write off payments, leases can essentially pay for themselves.
Leasing makes sense in a wide variety of applications as you consider enhancing your overall organizational capability. Like any financial decision, this is one where your accountant and/or tax professional need to be carefully consulted to determine the benefits of leasing to your business. However, in these turbulent economic times, leasing may be exactly the way to acquire new equipment that can increase and enhance your business operations. Now is the time to consider these ideas so that when the economic conditions return to normal, which they naturally will, you will be ready to achieve even greater sales and operational productivity.
