Why should I lease versus pay cash for equipment?
Leasing offers a variety of benefits over an outright cash purchase. Suppose you take the cash you'll use to purchase equipment and re-invest it in your business. You can use it to advertise, purchase inventory, hire and train employees, etc. By matching your payments to reimbursements or benefits from using the equipment, you can better manage your cash flow.
A Dun & Bradstreet study revealed that most companies earn 12% on every dollar of working capital it retains in the business. Cash is a primary component of working capital. To the extent you deplete cash, you also reduce working capital and other pertinent liquidity ratios. The result: lost earnings and lost investment opportunities, which can lead to reduced credit ratings. Here are two examples:

1. You are comparing the cost between paying cash or leasing $30,000 worth of equipment over 36 months. If your working capital return is 12% (like most companies reported in a recent D&B study), the present value cost of that $30,000 investment would be $42,923 at the end of 36 months. That amount represents lost earnings or lost investment opportunities. While leasing is a cost, it's generally the more prudent financing alternative. This statement is backed up by the fact that eight of 10 companies use leasing in some form in their operation.
2. A cash purchase uses after-tax dollars to acquire equipment. To generate "X" amount of after-tax dollars, you must make "X/1 minus the tax rate" in pre-tax dollars. Lease payments already use pre-tax dollars.

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What is the difference between an Operating Lease and a Capital Lease?
With an operating lease, such as a lease with a fair market value (FMV) purchase option, the term is shorter than the expected useful life of the equipment. Rental payments do not cover the equipment cost during the initial lease term. This type of lease is popular when the possibility of near-term equipment obsolescence is likely. From an accounting standpoint, an operating lease is the simplest type of lease because the lease payments may be deducted as a business expense. There is no requirement to include the asset on the balance sheet, as long as the footnotes to the financial statements indicate the amount of your firm's lease rental obligations. With a capital lease, the lease term spans 75% or more of the leased property's useful life. The Financial Accounting Standards Board (FASB) requires the lessee to record the equipment as an asset and a liability on its balance sheet. Rentals tend to be lower because of the longer term and less residual risk. As always, check with your accountant to confirm that tax laws affecting these matters have not changed.

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An equipment purchase isn't in my budget this year.
Leasing translates capital outlays into low monthly payments. A lease structure can be developed to accommodate your budget constraints.

My tax accountant says I can't buy more equipment.
Leasing avoids the tax implications associated with equipment ownership. Tax leases give you the cost savings benefits associated with ownership because we pass these along through lower monthly payments. You get the benefits of ownership without owning.

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Why would I want a tax type lease as opposed to a financing lease?
Tax leases offer the lowest monthly payments and the entire payment can be deducted as a business expense. Tax law changes have eliminated some of the most attractive benefits of equipment ownership. Discuss this with your tax advisor to be clear about your needs and to confirm that tax laws still permit it.

I'm not sure whether or not I want to own this equipment in three years.
Many customers are concerned about equipment obsolescence. Tax leases give you the lowest monthly payments and an end-of-lease option to either purchase the equipment or return it. With leasing, you have the flexibility to upgrade to new and improved equipment at the end of your lease term.

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How can I save on taxes?
In a tax-oriented lease (FMV lease), the customer normally receives deductions for the full amount of the rental payments on their tax books. Another benefit of these leases is the potential to avoid or reduce minimum tax. Talk to your accountant for specific guidelines.

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What type of lease is best for my company?