In an industry that requires a large sum of cash flow, many construction companies seek to lease equipment rather than purchase it. Leasing serves as an option for businesses with equipment that requires frequent updating or a large out-of-pocket investment. The money freed up by leasing can be spent on other business opportunities that generate profit, such as marketing and research.
Leasing gives contractors the ability to regularly upgrade equipment with a fair market value (FMV) lease option. When purchasing new items, contractors tend to keep the equipment far beyond its useful lifespan. Leasing allows for necessary upgrades that let a company continue to develop.
In most cases, the government considers leased equipment as an "off-balance sheet operating expense." Equipment purchases up to $250,000 can be deducted from taxable income under Internal Revenue Service (IRS) Section 179 with a dollar buyout lease. With an FMV lease option, the lease payments can be deducted during the term of the lease rather than over the life of the equipment.
The IRS’s Alternative Minimum Tax rule doesn’t apply because equipment leases may not be considered "assets." Each business is different, so it is essential to consult with a tax advisor before entering into a lease.
How It Works
The contractor and leasing company form an agreement to finance the necessary equipment. Essentially, the leasing company (the lessor) allows the construction company (the lessee) to lease the products and pay a monthly fee during a fixed time period—typically two to five years. The lessee must determine whether to purchase or trade in the items at the end of the lease before determining the appropriate type of lease.
Any business owner can be a lessee. Leasing companies secure the finances to pay for the equipment from a bank. They complete all necessary paperwork, correspond and negotiate with the equipment vendor, and essentially serve as a middle man. The contactor picks out the equipment and negotiates the price. The leasing company ensures payment and delivery of the purchased equipment and any future needs. The lessor then completes the lease and provides the funds directly to the vendor to purchase the equipment for the business owner. The lessee bears the risk of equipment loss or damage, so insurance is necessary on all purchases.
Equipment leasing companies already have established relationships with financial institutions. This allows for quick processing of the purchase with little hassle. Another benefit is that unlike a bank, an equipment lease does not affect established credit lines or the ability to secure additional credit. No financials are required on purchases under $100,000. Equipment leasing doesn’t require a down payment, and 100 percent of the equipment cost can be financed. Many equipment leasing companies even allow sales tax, delivery, installation and training to be added to the lease. Additionally, a lease doesn’t tie up the business owner’s personal credit to qualify, and in most cases it offers substantial tax benefits.
Types of Leases
Business owners who expect a decrease in the value of their leased equipment are best served with the FMV lease. This lease agreement provides three options upon its termination: purchase the leased equipment at fair market value, renew the equipment lease or return the equipment. The dollar buyout lease ends with the option of "buying" the equipment for $1. This is an appealing selection for business owners leasing equipment that will not lose value and who want to keep equipment at the end of the lease.
Many equipment leasing companies also offer commercial leases for equipment purchases exceeding $100,000. With this particular lease, many banks include equipment leases on a business’ available credit and reduce the credit limits accordingly.
The construction industry, and particularly new contractors, can benefit immensely from leasing equipment. The amount of available cash flow increases dramatically—a necessity in today’s economy.
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Wednesday, February 8, 2012