For most Organizations, Equipment Leasing is often the best way to finance needed
equipment acquisitions. The common benefits include the preservation of cash and/
or existing credit facilities. In the fourth quarter, it may be even more impactful as a
corporate tax planning strategy.
Several important tax issues are discussed below:
Mid-Quarter Convention (MQC)
MQC is a tax strategy that must be analyzed. MQC occurs when a corporation
acquires 40% or more of its total equipment acquisitions in the final quarter of the
year. When this occurs, the IRS will require the Corporation to recalculate its depreciation
utilizing the mid-quarter convention table. Utilizing the IRS table results in a
reduction in the maximum available depreciation for all of the equipment acquired
during the year thus resulting in a tax increase for the corporation.
Alternative Minimum Tax (AMT)
Companies in AMT or nearing AMT should analyze how a late year equipment acquisition
through cash or loan may compound the AMT issue. As in the prior example,
after-tax cost of the equipment will be increased if AMT occurs.
Net Operating Losses (NOL) and Loss Carryforwards
Equipment Leasing may lower the net tax position over and above the purchase of
the same equipment. This occurs as follows: In a cash purchase or an acquisition
through a conventional loan, Corporations must depreciate the assets acquired. If
NOL or Loss Carryforwards are available, it is possible that the Depreciation Expense
may not be able to be fully utilized (especially with accelerated depreciation).
The corresponding result may be an increase in the after-tax cost of the equipment
What This Means for Your Business
All equipment acquisitions should be analyzed to determine the optimal way to finance
them. Issues such as cash flow, obsolescence risk and balance sheet effects
should be reviewed. At year-end, there are a few important tax accounting situations
that take the forefront and need to be carefully studied. Please contact RCA immediately
if these issues have appeared for an impending equipment delivery and
we will provide assistance in your analysis. Please also know that if equipment has
been delivered, it’s not too late to explore a “Sale-Lease Back” to avoid the tax implications.
Please contact RCA soon if any of the above may be at play for you.
Renaissance Capital Alliance is a Certified Minority Business Enterprise engaged
in the equipment financing industry. RCA specializes in the leasing of forklifts and
material handling fleets. Through our comprehensive tracking and lease management
database, industry experience, and customized lease programs, RCA has become a
valued resource to both plant and corporate associates at some of the world’s largest