Finance for Non-Financial Managers and Small Business Owners

By Lawrence W. Tuller | Go to book overview
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Chapter 14

TAX LAWS CHANGE with dizzying speed. Accounting regulations shift like sands in the desert. Innovative financing tools pop in and out of favor like jumping beans. But leasing stays the course as tenaciously as a bull terrier. Perhaps the main reason for leasing’s popularity is that, in contrast to other financing methods, its flexibility and versatility are virtually unlimited. Many companies are attracted to leasing because it requires very little or no down payment. Moreover, in contrast to the inhibiting constraints of bank loan documentation, leases can be customized to meet any company’s needs. In fact, rental payments can often be stretched over a much longer period than most banks will accept for loan payments.

At the millennium, the U.S. Department of Commerce released statistics showing more than $200 billion in outstanding equipment leases alone. The leasing industry estimates that new leases in excess of $1.5 billion are written every year and that that number is likely to triple in the foreseeable future.

The form of a lease depends on a company’s needs and the assets being acquired. Certain leases are really lease-purchase agreements, wherein the lessee records the equipment or property as an asset and the lease obligation as a liability. For leases that do not meet this criterion, no asset or liability is recorded and rental payments are written off when paid, just like any other operating expense.

The Internal Revenue Code also affects lease structures. The deductibility of rental payments, lease-related expenditures, and tax credits obviously plays a major role in a company’s cash flow. Don’t


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