Suppose we all had a money tree. What a splendid garden it would be, carefully tending our trees, pruning each branch.
Spring brings that first sign of new life; we’ll call it loose change. That makes a person feel good – there’s hope for vast rewards. Summer – ah summer – shows us the bold green color of our hard-earned bounty.
Then, glorious autumn. With each dollar in full maturity dropping on the yard, our treasured money tree is giving us the pleasure of literally raking in the dough. (And I don’t want to talk about winter!)
Of course, there is no money tree. Rather, we all deal with a little thing called reality when it comes to commerce. Yet even in this less-exciting version of the universe, there are ways of making your financial gardens grow and bloom
In Plain English
Leasing equipment, rather than buying, can present the potential for positive progress. In my discussions with vendors and customers, I find some who are all for leasing, while others can’t see how it fits into their plans. How about a look at “Leasing 101” to get a better understanding?
The best place to start is with a definition in plain English. An equipment lease is simply a contract between a lessor (the company providing the lease) and a lessee (the end user). The lessor rents products to the lessee for a mutually agreed-upon period of time and specific rate of pay.
The two parties also agree to a purchase option for the equipment, or it is returned at the completion of the agreement.
In the U.S., there are two basic types of equipment leases offered for general business equipment. (The IRS defines other types of leases, but in the majority of cases, we’re talking about the “big two.”)
One option is the Capital Lease, very similar to an installment bank loan, and, like loans, they are treated as purchases. At the end of the term, the lessee (that’s you!) takes an ownership position.
The assets of a Capital Lease appear on your balance sheet, with the equipment included on the depreciation schedule rather than treating it as a line item expense.
Tax code incentives (which are constantly changing), such as the 50 percent depreciation bonus, play very well come tax payment time. And note that a Capital Lease is an interest-bearing note, so the interest on the lease can be classified as an expense.
On the other hand, there is the True Lease. Let’s say that you and your accountant (because you should be talking with your accountant!) have agreed it’s better to treat your lease as a rental agreement.
A True Lease can be carried off your balance sheet and listed as a line item deduction. Note, however, that these payments are not interest bearing! The payments are 100 percent written off against pre-tax dollars, minimizing your taxable income.
Like any other tax break, there are rules, so don’t get misled into thinking that a pre-set buyout, for example, 10 percent, is going to qualify you for this program. If this lease is treated as a purchase in any way, then it’s not a True Lease.
As a result, my advice is not to tango with the IRS. Or get anywhere near them, for that matter. (If you happen to have it kicking around, consult the July/August 2000 issue of Live Sound for more information on these rules or ask a qualified accountant.)
It’s always been my position that large-ticket items typically leased by live sound professionals should be capitalized. After all, ownership is usually the long-term plan of action, isn’t it?
And remember this very important rule: when capitalizing a lease, be sure to have – in writing – the exact purchase option whether it be $1, $1000 or 10 percent. I’ve heard so many horror stories about end-of lease disasters. In fact, some really well-run businesses won’t touch leasing because of this very thing.