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Proper equipment is essential for performing your work and delivering on your contracts. However, the high cost of equipment can hamper your bottom line in the long-term if you haven’t chosen the right avenue of financing for your situation. Don’t become consumed with the old concept of buying all of your equipment upfront. As a part of your construction accounting strategy, the construction CPAs at Doeren Mayhew recommend analyzing whether to rent, lease or buy. A hasty equipment purchase can lead to a lengthy financial burden, so take the time to evaluate and get the most bang for your buck.
Before deciding whether to rent, lease or buy equipment, there are several considerations to make:
Once research has been conducted, you can make a more conscious decision as to whether it is economically savvy to buy, rent or lease equipment.
With the current economic climate in the construction industry, leasing has evolved as the most favorable of the three acquiring options. This is in part due to lower-than-normal interest rates. Leasing is an interval-based payment option, usually lasting at least one year and offering incentives such as:
When considering leasing equipment, it is important to know that there are two types of leases that can be recognized for accounting purposes:
While many prefer operating leases, standards have been established by the Financial Accounting Standards Board (FASB) that qualify equipment under a capital lease or an operating lease. Each of these types of leases requires different accounting treatments. If equipment does not fall under at least one of the four criteria established by FASB for a capital lease, then it automatically qualifies under an operating lease. The criteria set by FASB are as follows:
In either case, ensuring that you will be able to use the equipment the entire period of the lease is extremely important. Early turn-ins often result in additional fees that you didn’t originally anticipate.
It’s no surprise that making incremental payments as opposed to buying outright is more affordable upfront. However, it’s common for rates and fees to fluctuate depending on the lease. Be very aware of the term agreements you sign and how that might influence interest rates and additional fees that you originally may not have anticipated.
For those not intending to use equipment for a long period of time, or simply wanting to cut costs, renting is another alternative providing several incentives, including:
As opposed to taking out a loan to buy equipment and affecting your credit-to-debt ratio, renting is considered a separate transaction and will not count against current debt. It enables you to expense costs immediately and is applied against your taxable income. In addition to no tax on rental equipment, there are no hefty guidelines aligned with accounting for equipment, as with leases. While there is less hassle to renting when it comes to accounting for payments, your equipment is at the mercy of a rental company, meaning less control over rates, fees and maintenance. Relying on a rental company to repair and monitor equipment can be an advantage as well as a disadvantage for this reason.
If you are convinced that having complete control of your equipment is the only way to go, then buying is the best alternative for you for a few reasons:
Due to several new tax laws, buying can prove to be profitable this year, especially for smaller construction companies and contractors. The following are effective in 2012 under Section 179 and can be applicable toward purchased equipment:
Weighing all three choices, you can now make a sound decision when obtaining your next piece of equipment. But do not feel the need to take on this critical decision alone. Hire a construction accounting professional and attorney to help you review and understand the accounting implications and contractual agreements.
This publication is distributed for informational purposes only, with the understanding that Doeren Mayhew is not rendering legal, accounting, or other professional opinions on specific facts for matters, and, accordingly, assumes no liability whatsoever in connection with its use. Should the reader have any questions regarding any of the news articles, it is recommended that a Doeren Mayhew representative be contacted.
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