When Start-Ups Should Lease?

Startups should explore equipment financing with Beacon Leasing  if they:

  • require a lot of expensive equipment but wish to avoid tieing up large sums of money on the downpayments required by purchasing,
  • need to change their equipment frequently and thus avoid having capital tied up in soon-to-be-obsolete equipment,
  • have the cash flow which can readily cover the monthly payments but don’t have the money to lay out for a purchase of equipment.

Equipment Leasing

Instead of your startup buying equipment, it can lease it. Under a lease you contract to pay a monthly rental fee for its use. Equipment leasing is available for all types of equipment from major manufacturing equipment to smaller equipment such as computers. Equipment leases are available from banks and finance companies as well as from equipment manufacturers and dealers.

Avoiding the “Double Tax Whammy”

Under the Tax Reform Act of 1986 Congress took aim at small to medium sized businesses that had been reducing their overall tax liability by claiming depreciation on equipment they had acquired.  Although the subject is rather complex, the net effect is that companies who have used equipment depreciation to significantly lower their tax liability are subject to a review that may have the effect of classifying some of those depreciation write-offs as “tax preferences” and subjecting those same companies to an additional “Alternative Minimum Tax,” in addition to the taxes they would otherwise owe.  Owning or purchasing too much equipment, while lowering the traditional tax component, can now trigger the addition of new added taxes.  The good news: equipment lease payments that are treated as rentals (real FMV) do not qualify as tax preference items and have no adverse effect on AMT liability.

Lower Your Tax Liability

With a cash, bank loan or finance type lease purchase you normally recapture some of your cash expenses by claiming depreciation on the equipment according to the IRS accepted “useful life” of that equipment.  You may also claim the interest portion as an expense during the term of any repayment.  Depreciation, however, can be spread over 5-7 years on long-lived equipment.  The same equipment on an FMV lease can (effectively) be 100% expensed during whatever lease term you select for the lease.  For example: you enter into a 36 month FMV lease on equipment that would otherwise have to be depreciated over say, 5 years and you will effectively have written off all of its value in just 3 years, instead of 5!

Tax Code: Expense Detail

This expense deduction is provided for taxpayers (other than estates, trusts or certain non-corporate lessors) who elect to treat the cost of qualifying property as an expense rather than a capital expenditure. Under Section 179, equipment purchases, up to the amount approved for a given year, can be expensed (deducted from taxable income) if installed by December 31st. Any excess above the expensed amount can be depreciated depending on the equipment type. Not all states follow federal law. Contact your tax advisor for the specific impact to your business or visit www.irs.gov.

Why I Lease?

  • Leasing offers flexibility and can be structured to fit your individual needs.
  • Leasing allows you to conserve your cash flow. We dont require a down payment, and we offer 100 percent financing.
  • Leasing offers tax benefits by being able to deduct your payment as a rental expense.
  • Leasing allows you the option to purchase the equipment at the end of the term.
  • Leasing allows business owners to pay for the equipment they use today, with the revenue they generate tomorrow.

To Lease or to Buy?

Here is an article on Leasing from Business Wire.

Association survey of the Small Business Administration’s State Small Business Contest winners, 86 percent lease equipment, for reasons that range from budgeting and establishing consistent cash flow to the ability to upgrade equipment more frequently.

However, although equipment can be leased to handle needs in almost any industry, many small to mid-sized business owners are unsure how to determine whether this option is right for them.

Common types of leases

“Most business owners believe they need to own their equipment,” says David Wolf, CEO of Hennessey Capital Leasing. “But it’s worth noting that the benefit of many assets derives from use, not from ownership, making the financial implications the most important consideration.”

Wolf adds that leasing provides greater flexibility in financing options for asset acquisitions and business expansion. “Every situation is unique, so the key is trying to find the right structure to fill that particular need.”

The two most common lease arrangements are capital leases and operating leases. A capital lease, which Wolf refers to as a “loan in disguise,” allows the lessee to depreciate the asset and write off the interest, while avoiding a large down payment. Capital leases appeal to businesses that ultimately plan to own the equipment but prefer to preserve their banking relationships and working capital for other ventures.

On the other hand, operating leases can be an ideal option for companies that regularly upgrade equipment. Operating leases provide a hedge against obsolescence: the ability to return the equipment to the lessor at the end of the term. This frees the lessee from any obligation and can facilitate the upgrade process. These leases also tend to yield lower payments and are expensed, so they don’t appear on the balance sheet as long-term debt. One of the most attractive features of an operating lease structure is the tax benefit, which allows the lessee to write off the entire amount of the lease payment. “In capital intensive industries, it can make a lot of sense to structure something as an operating lease,” says Wolf.

Optimizing Capital Equipment

Many physician group practices struggle over whether to buy or lease equipment. While purchasing has been the traditional method of acquiring equipment, leasing often can be more cost-effective. Conducting a lease-versus-purchase analysis can help group practices arrive at the most cost-effective

decision. Careful consideration of the alternatives can lead to the best use of the group’s resources to meet its financial goals.

Whether to lease or buy medical equipment is not always a clear-cut decision. Purchasing is the traditional method of equipment acquisition for most group practices, and many continue to use cash to acquire needed equipment.

The pressure to reduce healthcare delivery costs, however, has made more stringent reviews of capital equipment acquisitions imperative. As a result, more group practices are choosing to lease medical equipment. The advantages of leasing include flexibility, convenience, and protection against technological obsolescence. And, in many cases, leasing can be more affordable than purchasing.

Decision Factors

Analysis of major capital equipment acquisitions needs to go beyond a simple return on investment (ROI) or hurdle rate analysis and consider other factors, including the estimated technological life of the equipment and the group’s financial position.

Technological life of the equipment. The equipment’s useful technological life should be considered in light of the group’s long-term goals. Equipment that is projected to become obsolete over an anticipated period of use is a good candidate for leasing. A properly structured lease allows the user to shift the risks of technological obsolescence to the lessor and acquire new technology at the end of the lease term. The lease also allows the user the flexibility to purchase the equipment or renew the lease if the group decides the equipment can continue to provide the required level of performance .    Click here for more.

Obtaining New Equipment

Leasing is a popular, cost-effective means of acquiring industrial equipment. You rely on equipment every day to operate and grow your business. However, the value of that equipment comes from using it, not owning it. By leasing, you transfer uncertainties and risks of equipment ownership to the lessor. This allows you to concentrate on using equipment as a productive part of your business not a drain on the bank account.

Factors to Consider

Significant factors to consider when choosing to lease or buy equipment are:

  1. Your cash — Hold or spend it; leasing preserves capital for other uses whether they are known or those that are unforeseen.
  2. Cost level — Instead of a large upfront dollar outlay when purchasing equipment, leasing minimizes it. Another way of asking that question is: “Do I have enough extra capital to spend today for something that will make me money (pay back) in months and years to come?”
  3. Equipment value — There is little financial benefit for leasing, when acquiring equipment under $5,000, due to fees ranging from $150 to $400 and higher rates for lower dollar lease amounts.