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Lease vs. Buy?
Q:
Subject: Leasing semi-trailersMr. Kerstetter,I have been in the semi-trailer leasing business for over 17 years. Naturally one of the biggest obstacles I face on a daily basis is competing against the bank or other financial institutions who offer typical financial arrangements, conditional sales or leases with purchase options. The arrangement we offer is an operating lease. Most companies seem to want to own the asset and shy away from the operating lease.
Is there any way to target companies that an operating lease would be to their advantage? Also where could I go to find out further tax advantages of leasing vs. owning and have it presented in laymen’s term for the sake of an easy, understandable presentation. Any help or suggestions you might have would be greatly appreciated!!
A:
There really is no universal answer to the lease versus buy question. It really boils down to the terms involved in a particular deal, especially the interest rate built into the lease payments. As I've mentioned on several occasions, I am not a fan of leasing cars and trucks because the leasing companies often have interest as high as 30% built into the payments. Comparing that to the interest charged on normal purchases makes that decision practically a no-brainer.
Other than the Section 179 expensing allowance for purchases, the tax breaks between leasing and depreciating are pretty close to the same for each.
From a business and financial perspective, one of the selling points for leasing instead of buying is the ability to often keep the debt off of the company's balance sheet, improving the important debt to equity ratio. We covered this point 33 years ago in my college accounting classes and it is still used today. In fact, I remember stories about Enron, before it crashed, mentioning how they artificially kept their debt levels low by leasing assets from subsidiaries and other entities that were owned by Enron executives.
I'm sorry I couldn't be more help.
Kerry Kerstetter
Labels: 179
- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 6/23/2006 02:21:00 PM Send this post:
