Fifth Third Bank leasing vs buying Featured

8:00pm EDT April 25, 2008

Anew provision in the tax laws might

change the way your company

looks at leasing versus purchasing.

The recently enacted provisions under

the Economic Stimulus Act of 2008 are

very similar to what was passed under

The Jobs and Growth Tax Relief Reconciliation Act of 2003.

The comprehensive package contains

some pro-growth elements, specifically

allowing businesses to accelerate depreciation deductions on their investment in

qualified property. Among other incentives, the provision allows for an additional first-year depreciation deduction

equal to 50 percent of the adjusted basis.

Smart Business spoke with Chris Bell

and Mark Zink, vice presidents in the

Equipment Financing and Leasing Group

at Fifth Third Bank, about what to expect

under the new law and how to determine

whether to lease or purchase.

How common is equipment lease financing

in today’s market?

Equipment leasing is a major means

that companies and municipalities of all

types and sizes employ to acquire equipment. The current economic landscape

has CFOs looking for creative ways to

fund equipment acquisitions and manage

capital budgets. A renewed focus is being

squarely placed on working capital and

increased liquidity. This sensitivity to capital value tends to enhance leasing as an

alternative to traditional debt financing.

Companies lease for many reasons, but

seldom exclusively, to avoid the capitalization of new equipment. The most common reasons for leasing are to match

cash flow to productive use of assets, to

avoid technological obsolescence (return

and upgrade), for 100 percent loan to

value financing, for efficient use of tax

incentives for acquiring new equipment,

to improve cash flow benefits and to

expand available credit.

How does a company’s tax status affect the

decision to lease or buy?

A company should look at its current

and future tax situation to determine the optimal structure. Taxpayers should optimize their current tax benefits and forecast against their minimum tax positions

in the future. Some companies may find

that they may not be able to immediately

utilize some or all of the tax benefits

resulting from purchasing equipment. A

tax lease will effectively transfer those

tax benefits to the lessor in exchange for

lower rental payments.

How do my long-term intentions with the

assets impact the decision to lease or buy?

It is important to consider your plans

for the acquired equipment up front.

Obviously, things may change over time,

but you should consider some of the following in advance: How long will I need

the equipment? Is technological obsolescence of the equipment a threat? Could

inflation threaten the future market

value of the equipment? What is the value

of cash savings from leasing to the company? Perform a lease-versus-buy analysis, which compares the after-tax cost of

ownership. The lessor can assist with

this analysis.

Are there certain organizations that qualify

for tax-exempt leases?

Each state has its own statutory guidelines for tax-exempt lease qualification.

Generally, political subdivisions, such as

counties, cities, villages, townships,

school districts and fire districts, fall

into this category. In contrast to other

traditional forms of tax-exempt financing (i.e. bonds and notes), leasing is subject to the lessee’s annual appropriation

and is thereby not typically considered a

general debt obligation.

In addition, some other not-for-profit

organizations, such as hospitals and private schools, can utilize tax-exempt leasing through the support of a local municipality. These entities typically utilize

this form of financing mainly for an

effective low-cost, tax-exempt solution

to finance assets over their economic

useful life.

Are there any intangible benefits to leasing?

Working with a leasing facility can be a

very positive experience for a company.

From an efficiency perspective, equipment lease lines of credit are often put in

place early in a company’s fiscal year to

manage capital expenditures. The facility may be structured so that deposits to

the equipment vendors may be funded

under the line on an interim basis and

then upon delivery, termed out into the

appropriate lease schedule. The fixed

rate form of lease financing provides an

ability to plan for future business needs

and is a predictable means of matching

revenue and expenses.

Are there asset classes that do not work

well in lease financing?

Virtually all types of equipment can be

leased with the main exception of limited- or special-use property. Under IRS

guidelines, property must be of use to

someone other than the lessee or a related party.

CHRIS BELL and MARK ZINK are vice presidents in the Equipment Financing and Leasing Group at Fifth Third Bank. Reach them at

ChrisS.Bell@53.com and Mark.Zink@53.com, respectively.