Let’s wrap up my little “leasing and accounting” series by going away from the complicated, and embracing the simple.
People ask me all the time “what is the best type of payment structure for my business, leasing or financing?” And I always answer with another question: “what is your company goal in wanting this transaction?”
Here are the most common scenarios/answers, and the general type of payment structure that works best:
“I Want Monthly Payments and to Use Section 179”
This is far and away the most common answer – the company wants to buy equipment now, and for budgetary/cash-flow reasons, wishes to make monthly payments instead of paying cash up front. In this case, a straight equipment financing agreement (EFA) will suffice nicely.
In this scenario, the equipment is on the balance sheet as an asset, as the borrowing company is the owner of the equipment (with the lender holding a lien until the loan is paid off), and a full Section 179 deduction can be taken right away.
Now, certain leases also accomplish “monthly payments and Section 179” but they are usually only employed at the lender’s discretion – maybe the lender only writes leases for some reason and sees no reason to change.
So yes, wanting monthly payments = EFA. Simple, effective, and good for small to mid-sized companies because it allows for a full Section 179 Deduction.
I Do Not Want the Equipment on My Balance Sheet
Ok, NOW we’re getting into another area. In this case, an EFA (or something like a $1 / 10% purchase option lease) will NOT do. You would need an Operating Lease.
In an accounting sense, this views the equipment as an expense, and not an asset. The lease payments for Operating Leases are usually tax-deductible expenses, but a Section 179 deduction is not possible (because the lessor/borrower does not own the equipment).
It’s usually larger companies that want this, as the off-balance sheet/expense aspects are attractive (to give one example why, many companies do not need board approval for expenses, but do for capital expenditures, making leasing an efficient way to acquire needed equipment).
I Always Want New-ish Equipment Without Maintenance Costs
This is another popular scenario that a FMV Lease works well for. Perhaps a company relies on equipment where “the latest and greatest” gives them a competitive advantage. Or the equipment is such that they’d rather not deal with age-related maintenance issues.
For equipment like this, the company would rather they never actually “own it”, instead choosing to lease it for several years, turn it in, and then lease a new one.
In this scenario, the company always has a monthly payment, but since they always have a “new” model, maintenance costs are likely reduced, and they always have the latest features. Consumers do this with automobiles all the time.
Ok, there are some of the main reasons a company would want a monthly payment option. As you can see, the reasons vary wildly (from simple “monthly payments make sense to our budget” to more complicated off-balance-sheet needs), but regardless of the reason, there is a finance/lease structure that can satisfy it.
In fact, take a look at Crest Capital’s different lease and loan offerings with explanations.
Of course, none of the above is to be considered definitive tax or business advice. Consult your accountant for further information.