Understanding Equipment Leases

Equipment leasing is an attractive alternative means to acquire needed business equipment.

Equipment leasing is a financing alternative for businesses to acquire needed machinery while saving precious operating capital. Leasing has definite advantages over traditional financing and can even have advantages over paying cash. With business, it's about being able to use money to make more money. Leasing provides opportunities to use available money to operate assets that can make more money over time. When considering expanding current capabilities or replacing aging equipment, leasing is one option for businesses to consider.∫

Lease Essentials

Leasing is in essence paying rent on equipment instead of purchasing it outright. Furthermore, leasing reduces the regular payments made to operate the equipment. Leases can be structured so a business pays rent not on the total value for the equipment, but solely for the depreciation. If a piece of equipment loses 20 percent of its value annually, then the monthly lease payments for a three-year lease would be 60 percent of the value divided by 36. Additionally, leasing companies are required to collect certain taxes and fees to administer the lease. These monthly payments would be far less than the financing charges for the purchase of the equipment in three years.

Equipment Return

With an equipment lease the business can opt to return the equipment when the lease expires with no penalty. This is not a repossession or a punitive action. The lease term is completed and the equipment is returned to the leasing company. The company also may have the option to pay the balance on the value of the equipment to keep it or use the end of the lease term as an opportunity to acquire new equipment to continue operations.

Lease/Purchase

Some leases are structured as lease/purchases. This allows the business to garner all the benefits of leasing while at the same time actually paying the full value of the equipment during the lease term. The payments are structured so the end of the lease term sees the total amount paid equals the value of the equipment. Usually, the end of the lease/purchase term is also the maximum amount of depreciation allowed on the equipment for tax purposes.

Taxes

Equipment leases have the added advantage of being tax deductible as a business expense. As opposed to business financing where only portions of interest paid are deductible, business can deduct the full lease payment as an expense. Also, the business can deduct over time the actual depreciation for the equipment. This double tax advantage can lead to the actual cost of servicing the lease will equal the tax savings.

Lease Buybacks

Equipment leasing can also be a means to raise quick capital. If a business needs funds to purchase raw materials, parts, supplies or other business costs (insurance, fees, back taxes, etc.), the business's equipment can be leased back to the business. The leasing company will take title to any equipment the business owns and offer fair market value for the equipment lease. The money is then paid to the business as cash. So the business gets the needed money and then pays over time the lease payments while enjoying all the tax benefits associated with leasing.

References

• Entrepreneur: Should You Lease or Buy Your Tech Equipment?
• Nolo: Business Equipment: Buying vs. Leasing