|
We believe that our flexibility and creativity are our greatest strengths. As a result, we look forward to customizing financing alternatives which make good business sense for our customers and which help us to establish long term relationships. We work closely with both existing as well as prospective clients to establish the most beneficial financing structure.
Changes in the tax law have compelled companies to consider leasing for their equipment purchases. The loss of investment tax credits has eliminated much of the incentive for ownership. When acquiring equipment consider this general rule: "If it appreciates, buy it! If it depreciates, lease it!" - John Paul Getty III.
The lease vs. buy decision
Pricing
AMT - Alternative Minimum Tax
Mid-Quarter Convention - 40% Rule
Sales Tax
Initial Cash Outlay
Balance Sheet Item or Footnote
Risk of Equipment Obsolescence
First Star Capital Lease Products
Summary
The lease vs. buy decision: Leasing an asset offers significant potential advantages over purchasing that same asset. It conserves working capital, liquidity and credit lines and offers 100% financing. A "true" lease (as more fully described below) offers "off balance sheet" treatment and is treated as a monthly expense. As a result, the entire lease payment is tax deductible. Because the lessor becomes the owner of the asset, it can depreciate that asset. These depreciation benefits allow that lessor to lower the lessee's monthly lease payments.
Outlined below are a few issues that may be factors in determining whether to purchase an asset with cash, borrow the funds to acquire the asset or lease that asset.
Back to Menu
Pricing: Depending on the ultimate structure of the lease, it is very likely that the overall cost of leasing an asset may be less than the cost of borrowing funds to purchase that asset. Many first time leasing customers do not realize this until we have an opportunity to present our lease proposal. Even the largest, most financially sophisticated, corporations lease capital equipment (including rail cars, aircraft, marine vessels, machine tools, rolling stock, communications equipment, construction equipment, medical equipment, food processing equipment, etc.)
Back to Menu
AMT - Alternative Minimum Tax: The basic concept of AMT is to ensure that all corporations pay a certain minimum amount of tax regardless of the fact that their tax obligation might be reduced below that amount by deductions such as accelerated depreciation. It was designed to address situations in which profitable corporations eliminated a substantial portion of their tax liability by deducting depreciation and other non-cash "expenses." In essence, because of AMT, it is possible for a company to generate more depreciation than it is permitted to deduct. In such situations, leasing may be an excellent option because the lessor would be able to take full advantage of the depreciation benefits and could pass these benefits along to the lessee in the form of lower lease payments. In addition, most true lease payments would still be a deductible expense. It is important to understand that not every lease fits this category. Our leasing professionals can assist our customers and their accountants in creating a lease structure which minimizes the impact of AMT.
Back to Menu
Mid-Quarter Convention - 40% Rule: It is no longer possible to buy equipment on the last day of a fiscal year and receive depreciation benefits for a full (or even one half) year. The mid-quarter convention - 40% rule states that if an entity purchases more than 40% of its total capital expenditures in the last quarter of its fiscal year, then depreciation benefits for all assets acquired during that fiscal year must be recalculated using the mid-quarter (not half year) convention. The mid-quarter convention provides that the appropriate amount of depreciation available is dependant upon the quarter in which the asset was purchased. Violating the 40% rule may substantially reduce initial useable depreciation. Leasing assets could prove to be the ideal alternative.
Back to Menu
Sales Tax: Leasing is sometimes used as a way to defer payment of sales tax. Sales tax is calculated on the base lease payment and included in the total monthly payment. This will make the initial expense of a purchase lower (in many states the sales tax rate is 7% - 10%).
Back to Menu
Initial Cash Outlay: Normally, leasing involves a lower initial cash outlay than would ordinarily be required in a loan. The classic lease would require only the first and last months payments in advance, which is usually far less than a typical down payment of 10%- 25% of the cost of the asset. In addition, freight and installation costs can usually be financed within the lease structure.
Back to Menu
Balance Sheet Item or Footnote: Equipment purchases often cause a company to be out of compliance with the ratios outlined in loan covenants (liquidity, debt-to-worth, etc.). In some kinds of leasing, neither the asset nor the corresponding liability are reflected on the company's balance sheet. The monthly lease expense is reflected solely on the income and cash flow statements. The lease obligation is described in a footnote to the company's financial statements.
Back to Menu
Risk of Equipment Obsolescence: Companies in highly competitive environments often need the most technologically advanced equipment available and cannot afford to be burdened with out dated or obsolete equipment. Leasing transfers the risk of equipment obsolescence from the customer to the lessor. In addition, at the end of the lease term,the equipment can usually be returned to the lessor without penalty. As a result, the customer is then able to acquire new equipment which is faster and more efficient.
Back to Menu
First Star Capital Lease Products
Tax Lease Purchase ("TLP"): A TLP is a tax lease designed to allow for the ultimate purchase of the equipment at a pre-agreed date (window) for a stated value by the lessee. In many ways, it's the best of both worlds. Typically, high value equipment fits best into this kind of lease. A careful balance must be maintained to comply with both Tax and Accounting rules. A normal circumstance would involve equipment with a 60 month depreciable life but a value at 60 months of 25% or more. The "window" would allow for purchase of the equipment by the lessee during the 48 the month for an amount agreed upon at the onset of the lease (approximately 40% of initial cost). Up to that point, the depreciation would be declared by the lessor and the lease should be able to be carried off-balance sheet by the lessee. If the lessee decides not to purchase the equipment at the "window", then the lease continues to maturity. At that time, the lessee may elect to purchase the equipment for its then fair market value or may simply "walk away." If the sum of the lease payments, up to and including the purchase amount at the window, are used to calculate the effective interest cost, it will be found to be very competitive.
True / Operating Lease: A true lease is a "walk away" tax lease. The lessor buys the equipment and leases it to the lessee for an agreed upon term and then sells the equipment for fair market value and the end of the lease. This kind of lease is most popular for equipment with low future value due to use or technological change. True leases enable companies to acquire the most technologically up-to-date equipment with fixed monthly payments, but also enables them to pass on the risk of obsolescence to the lessor. The lessor has all the rights to the depreciation benefits and bears the risk of residual value. A true lease is usually an off balance sheet lease. Typically this lease will meet FASB 13 accounting rules.
Lease Purchase: A lease purchase is designed for ultimate ownership by the lessee. Because the residual is a specific dollar amount (typically a nominal figure when compared with the actual value of the equipment at the time of exercise of the option) this is not a tax-oriented lease. All depreciation belongs to the lessee and the asset must be shown on the lessee's balance sheet. Advantages of a lease purchase include paying sales tax overtime and a low initial "down payment." Lease purchase transactions are flexible by design and can usually be tailored to suit the special needs of the lessee.
Back to Menu
Summary: On all our products, payment amounts and frequency can be tailored to meet our customer's projected cash flow. Options include quarterly, semi-annual, seasonal, graduated and skip payments.
First Star Capital offers a wide variety of leasing alternatives. Each is designed to suit the particular needs and conditions of the customer. With the advent of the Alternative Minimum Tax, capital budgeting is a very relevant factor in considering the timing of equipment purchases and the ultimate ability to use the tax benefits for the useful life of that equipment. Leasing can provide a means of maximizing cash flows by keeping initial outlays and monthly payments low. Some leases provide for the ultimate ownership of the equipment by the lessee while allowing for off balance sheet accounting during the lease period.
There are numerous considerations when determining the best method of acquiring additional equipment for a business. To assist our customers with their decisions, First Star Capital offers sound professional advice and aggressively priced alternatives.
Back to Menu
|
