Leasing is a means of acquisition of equipment which allows
the user to gain the benefits of productive equipment without
using existing capital, without raising new capital, and without
reducing existing lines of credit. The equipment is paid for out
of the savings it generates.
CONSERVES WORKING CAPITAL
Working capital is the life blood of every company. By freeing
working capital, leasing makes cash available for expansion, trade
discounts, new merchandise, sales promotion, and other vital business
Leasing permits accelerated write-off of equipment because rental
payments can be 100% tax deductible. This benefit has the effect
of reducing the tax liability which decreases income tax payments
and increases cash on hand. Rental deductions are not subject to
the Alternative Minimum Tax computation. Accelerated depreciation
is a preference item for alternative minimum tax computations.
Leasing helps avoid the mid-quarter convention. The new tax law
requires taxpayers to use modified depreciation for all assets placed
in service during the year if more than 40% of the assets were placed
in service during the fourth quarter. Assets placed in service in
the middle of the year would be deemed placed in service in the
middle of the quarter in which they were actually placed in service.
Leasing keeps the lessee's balance sheet liquid by not reducing
current assets such as cash, negotiable securities, or receivables.
Leasing compares favorably to an outright purchase for cash where
cash on hand is decreased and the machine and equipment account
increased, or a bank loan where a fixed asset account is increased
and a long-term liability is set up.
Depending on the tax bracket, the true cost of leasing could be
sharply reduced by the tax savings gained. This serves to bring
the true cost of leasing below the cost of an outright purchase
or a bank loan in most cases.
Leasing can eliminate the risk of equipment becoming obsolete. Equipment
can be replaced at the end of the lease without concern over book
losses or depreciation schedules, providing the lease is geared
to the useful life of the equipment.