Lease vs. purchase???? ~ topic from 2005

[TowZone]

08-08-2005: Original Poster RodVT

 

It USED to be that there was a serious advantage to leasing over buying, tax wise, because you could deduct the full payment as a business expense if it was a lease, but you were limited to IRS approved depreciation schedules on purchases, which weren't all that generous. These days the annual depreciation allowances seem larger than they used to be, but I really don't understand all the different schedules which are allowed (other than I know you can do like up to $20,000 in a single year).

Does anyone know enough about them to chime in with meaningful dollar amounts, so we can make good purchasing decisions without calling our accountant first? (Grant Mac., are you around?)

Thanks,Rod

 

Rudy Smith said:

 

Rod you must not have anything to do this evening.

Short answer = BUY THE EQUIPMENT!

It is a math problem with a dollar result.

The following needs to be known to construct the problem.

What is your bank interest rate vs your lease factor?
Will a bank lend you money using only the vehicle as collateral?
Is there a differance in the insurance requirments?
How long will you keep the truck (time not miles)? Note that the deprecation is never calculated with miles.
Current excess cash flow vs tax burden?
How large is your fleet?
What is your current deprecation per month & what is the change schedule (when will other assets fall off (run out) of depression)?

Also, even after you have an answer, it may not remain the right answer. Currently the excess deprecation allowed by the Fed will sunset unless renewed during the next session. Most expect it to be extended but you can never be sure. In addition some lease costs are not known until the vehicle is sold at the end of the lease which is effected by a changing market.

It is a decision that you should always make with an accountant.

Most businesses with good banking relationships and stable books of business have always been better off by buying. This was true even before the accelerated Fed deprecation schedule changes.

The only 2 reasons that I can think of that would push the net costs in favor of leasing would be in a business that is under going rapid growth, that is spinning excess positive cash flow and profits and is not going to keep vehicles more than 3 years no matter what. In this case the company can get the vehicles that it needs for the growth while matching the lease costs to the revenue created, saving bank financing for other needs and reducing the tax burden caused by the excess cash. Not an everyday occurrence in towing.
OR
The guy who runs low miles and replaces his vehicle every 3 years like clock work. (we do this with our company cars)

VAGUE ENOUGH?

 

Grant said:

 

Historically the incentive to lease was the fact that you did not have to put anything down. Nowdays financing is available for very little down without being in jail on a lease.

As Rudy said, there are some financial issues such as the cost of funds issue he brought up but us towers generally add the payments up and see which one is the lowest cost...especially when dealing with little down...and we plan on keeping the truck for 5 years or more.

Where I think times have changed, Rudy, is that in the past those stable companies have changed to recycling their fleet in shorter periods of time than the current financing terms allow and so they tend to go to a hybrid product: Leasing company finances just like a lease but you treat it like a loan because you get a bargain purchase at the end such as a $150 lease-end purchase...and the low downpayment. The leasing company charges you "first and last" payment but it is really treated for tax purposes as a loan and therefore is depreciated. The leasing company, because of laws passed a few years ago, can treat it as a lease because, in essence, they are refunding you some of your lease payments to pay them a purchase price at the end of the lease...they don't, but that is basically the way it is structured.

 

The additional depreciation available now was put in place as an incentive for you to buy new equipment and stimlate the economy out of post 9/11 recession. However, the "20K" you were talking about has been in place since 1986 and is called Section 179 depreciation allowance. This allows you to write off a certain amount (back then it was $7,500, now its up to $100,000 with certain limitations) in the year the truck or equipment is purchased. This has made it a very attractive tax planning strategy to buy a truck at year end if you plan on getting one before the summer because you essentially are taking a huge bite out of your taxes...while only paying the down-stroke, if any. Watch out for the limitations (and this is where consulting your CPA may be a good idea).

I guess here is the tell-tale answer: I buy trucks. We used to do this because we kept trucks a long time but have found this to be too costly. We now try to keep light-duty trucks for 5 years but sometimes that is not possible. Heavies we keep for longer but you can finance those for longer terms. The danger in taking accellerated depreciation is that you at some point in the future will still be making payments with little deduction and then the tax man will get his (he always does!). If you are growing and adding units, this is only an issue when you stop growing!

Bottom line is that lease vs. buy is generally not a tax decision. You don't get a greater deduction going one way overall. After 5 years you have decuted the same amount. It is a financial one and, as I think Rudy was trying to say, it always has been (at least since they did away with the investment tax credit in the 80's). Now that financing companies have products that require very little down, why be locked into a lease for 5 years? Another downside to the TRAK product offered out there is a 20% lease-end purchase...try financing that 20%...been there, bought that t-shirt and turned down that financing offer a few times...won't do that product again!

 

I use a financing company that represents a lot of lenders and lessors. He quotes me on what he can get me in various products with different options and I go with the one that makes financial sense at the time. I am way ahead because I am not talking to a banker that has one product and can only make money selling you that one product...of course its the best! Leasing companies are the same way...I say that but be careful because some companies are XYZ Leasing but they have multiple products available. I also like the fact that I am not judging the purchase decision based on the payment being the cost of the vehicle. I negotiate the price and then look at financing options. Too often dealers will pitch a payment at you and there are too many ways they can make that deal look very sweet...I could finance a heavy to you for $500/month...yeah but thats for 40 years!...or with a $120,000 purchase option at the end of 7 years! Compare apples with apples: take the products and compare how much you will have to pay to own the truck at the end of the term. Total payments. You can compare any type of financing that way...especially these days with the low down option.

I laughed at Rudy's long answer...now I have written a book...maybe I should just agree with his "short answer" at the beginning of his response. I would buy in 90% of the circumstances. Leasing is somtimes cheaper in not so great credit situations because of the high down requirement or B-paper interest rate. I would consult a CPA but I would first consult with a good finance company. I would be glad to refer you to mine...his web link is posted on the www.towpartners.com web site under CFF. Talk to Matt.

Have a great week!

 

RodVT Said:

 

I have been busy the last couple of days, so I am still digesting this. I am fascinated to know there is a third option, financing companies, that are niether banks or leasing companies.

Grant and Rudy, you guys are great, and I appreciate the time you put into these posts, but I am having a hard time really understanding the options here. I hope we can brew this down to something a little more understandable in the next couple of days.

I'll give it a shot tomorrow.

Thanks,
Rod

 

Rudy Smith said:

 

Now you are stretching my brain.

Grant, do you still have to recapture excess deprecation if you retain a 5-year asset (Light-duty truck) at the end of a 3-year lease term without the 20% buyback? If so, don’t you give back any lease advantage?

 

Grant said:

N depreciation recapture if it has been treated as a lease but I think what you are saying is, "Do you have to recapture the lease deduction when you pruchase it." I have seen this defended both ways but naturally, the key thing is that if you deduct the lease payments, you cannot depreciate the "purchase price" if the finance agreement is structured as some kind of allocation of the lease payments made prior to that.

I think the issue is how to determine up front if it is a lease or a purchase. The simple answer to the initial question is that, given today's finance products available, I believe there is no tax advantage to leasing (a true lease, not one that is like a purchase) and possibly no financial advantage either.

The fancy dance is not only for our (buyers) sake. It is to enable the people who end up with the paper to take advantage of the favorable tax treatment of rental property. The finance companues can then sell the paper and the investor gets a better return because of the favorable tax treatment.

Have a great day!

 

FYI

Congress has extended the 179 depreciation to 2007. So, in 2005 you are able to take $105,000 and increases slightly in 2006 & 2007. In 2008 it will move back to $25,000.

Favors a purchase over a lease for most.

As sited above if you need equipment and have not spent $105,000 this year, buy it before December 31st.

 

Topic Ended  08-18-2005