This article originally appeared in the November/December print issue of IMPO.
Many manufacturers in recent years have put off acquiring new equipment and technology so they could conserve cash in preparation for the next economic curve ball. Although accelerated write-offs for capital purchases are now at pre-stimulus levels, when it comes to the benefits of leasing equipment in the fourth quarter, there are still good reasons to acquire equipment before the year ends.
In 2014, manufacturers have exhibited a moderate appetite to acquire new equipment and replace outdated machinery to guard against obsolescence. According to the Equipment Leasing & Finance Foundation’s Q3 2014 Equipment Leasing & Finance U.S. Economic Outlook:
• Investment in material handling equipment increased at a 1.8 percent annualized rate in the first quarter of 2014 and in July 2014 was up 6.8 percent year over year.
• Investment in all other industrial equipment rebounded at a 20.5 percent annualized rate in the first quarter of 2014, and in July 2014 was up 5.3 percent year over year.
• All other industrial equipment investment will likely see moderate growth in the fourth quarter as the “reshoring” of manufacturing continues to be a dominant economic story for the year.
Benefits of Fourth-Quarter Leasing
Leasing equipment in the fourth quarter is one way to address pent-up demand for the types of equipment that are the lifeblood of the manufacturing sector, whether material handling, machine tools, product and process control, plastic extrusions, semiconductors or water pollution and waste management treatment.
The benefits of leasing equipment in the fourth quarter often go unnoticed but include financial flexibility, avoidance of mid-quarter convention, maximizing tax benefits and accounting benefits.
By leasing equipment in the last three months of the year, manufacturers can also preserve capital and extend credit lines, spread acquisition costs over time, protect themselves from obsolescence, tailor payments to their budgets, enjoy easy upgrade opportunities and take advantage of flexible, end-of-term options.
Section 179 Benefits
IRS Code Section 179 is an incentive created by the U.S. government to encourage businesses to invest in equipment. In 2014, Section 179 covering accelerated write-offs for capital purchases returned to pre-stimulus levels. While the benefit is much smaller than in recent years, there is still the opportunity for manufacturers to deduct certain amounts of equipment and technology purchases to let the tax benefit continue to help them grow their businesses.
How does it work? Businesses purchasing $200,000 or less in capital equipment during 2014 can deduct up to $25,000 of that expense immediately on their 2014 tax return.
A qualified equipment finance partner can help manufacturers take advantage of tax write-offs to lower the true cost of ownership of business equipment. An equipment finance partner should be able to provide loans and non-tax leases that can keep manufacturers in the driver’s seat by letting them retain tax ownership of their equipment and use the Section 179 write-off to their advantage.
To qualify for the Section 179 deduction, equipment must be purchased and put into use between Jan. 1 and Dec. 31, 2014, and must fall within certain equipment-type definitions. Detailed descriptions of qualifying equipment can be found by visiting the IRS web site.
If your 2014 budget requires more than $200,000 in capital equipment investment, you’ll need to manage the tax ownership of those assets in order to maintain your Section 179 write-off. By using a lease to finance assets over $200,000, the financing company becomes the tax owner of the equipment, which allows you to maintain your Section 179 deduction on assets below that threshold.
Lease vs. Buy
Leading-edge technology, timeliness and scalability all play an important role in a manufacturer’s assets, but there is no single, best answer to the question of how to pay for required equipment. While equipment financing varies, a customized structure can help manufacturers reach their financial objectives.
For example, there are options to optimize cash flow, preserve capital reserves and maximize temporary tax incentives. There are even options that facilitate equipment replacement and upgrades.
Here are some factors for manufacturers’ to consider while assessing options:
Credit preservation – Financing equipment allows manufacturers to be nimble without depleting their capital reserves or bank lines of credit. By acquiring the equipment needed immediately, assets can generate revenue while being paid for over time.
Cash flow – Flexible payment options can optimize cash flow, address seasonal requirements and keep businesses competitive. In addition, equipment financing often involves little or no down payment. Typical out-of-pocket costs such as software, maintenance, delivery costs and training can be bundled into a single financing arrangement.
Equipment management – If using the latest technology is important, an equipment lease may offer mid-term upgrade and end-of-lease options, both of which help avoid the risk of owning obsolete equipment. Manufacturers may also have the opportunity to renew the lease, purchase the equipment, or return the assets at the end of the term.
Weighing the Benefits
Equipment financing, whether that is borrowing or leasing, can be used as a strategic tool: It lets manufacturers acquire and employ assets immediately and develop a plan to achieve long-term goals.
Whether a manufacturer’s objective is to optimize tax savings or enhance cash flow – or both – an in-depth analysis of equipment is necessary. Assessing current and future asset needs in the form of a lease vs. buy analysis will help determine whether a lease or loan is the best alternative.
To develop the most profitable acquisition strategy, consult with an equipment financing expert. In particular, seek someone with a background in the manufacturing industry and lease structuring expertise. In addition, always consult with a tax advisor before making equipment financing decisions. By doing so, you’ll be well ahead of the competition when you ring in 2015.
Peter K. Bullen is senior vice president – bank channel for Key Equipment Finance. He can be reached at [email protected] or at 216-689-8579.