CONSTRUCTION Accounting ARTICLE -
Same Equipment, Smaller Investment-Rental/Leasing Agreements Offer A Variety Of Potential Advantages

Target Audience: Construction Industry Professionals, Project Planners, Job Costing, Estimators, Spending Planners, Project Managers, Contractors, Construction Accountants

Investing in high-end machinery can be a big financial burden — especially in a down economy. That’s why more and more contractors are seeking to minimize costs by renting or leasing their equipment. Beyond the obvious cost savings, equipment rental or leasing provides several important benefits you may want to consider before making another substantial purchase.

Savings Across The Board

A typical rental/lease agreement involves little or no down payment. And, for the most part, renters/lessors tend to be flexible when it comes to payment requirements.

If you’re considering renting or leasing because of tight finances, being able to negotiate a lower payment provides a budget-friendly alternative to owning. Moreover, as opposed to taking out a bank loan to make an equipment purchase, renting/leasing is a separate transaction that will keep your credit lines open and won’t count against current debt, as long as it doesn’t qualify as a capital lease. Remember, however, that fixed payments on leases are sometimes considered in debt coverage ratios, which assess your ability to pay your debt.

Depending on a number of factors that your construction accountant can assess, including your business’s profitability and the state in which you’re located, you may still be able to reap some tax benefits from leasing rather than owning. That is, as long as the lease isn’t a capital lease, payments are tax-deductible overhead expenses.

In addition, renting/leasing equipment frees you from having to worry about the expense of maintenance and storage — and the hassle of disposal. And while most leases come with a purchase option (wherein most or all of the payments are applied to the purchase price), you have the freedom to move on to something more modern. You’ll also get the use of the latest federal OSHA-approved machinery.

Renting vs. Leasing

Depending on what the equipment is needed for (a single project or several assignments over a longer stretch of time), you’ll first need to decide whether you want to rent or lease. Renting involves a short-term agreement, so it’s ideal for use on a per-job basis — especially if a job is located out of state or requires special or project-specific equipment.

Leasing, on the other hand, is a long-term option. Thus, it’s important to compare the financing cost of the lease vs. purchasing the equipment outright.

If you do decide to lease, plan to have several key pieces of information on hand for prospective vendors to review, including a brief company history, your plans for using a particular piece of equipment, financial statements dating back at least three years, your leasing history and financial projections for a year from the time of the lease.

Let The Renter/Lessor Beware

When you’re ready to initiate a rental or lease agreement, shop around to compare rates and offerings from at least two or three vendors.

If you’re looking to rent for an individual project, be aware that most rental companies tack on extra fees for their services. Don’t be shy about negotiating — they just might knock off some of the extra cost or eliminate it altogether.

If you’ve decided to lease, be sure to find out what type of buyout language is included in the contract. Expect options such as:

• A dollar buyout, which allows you to buy the equipment for $1 at lease end,
• A percentage buyout, which specifies a percentage of the equipment’s original value as its purchase price at lease end, and
• An open-end lease, which allows the lessor to wait until the end of the lease to determine a selling price, which is based on factors including the equipment’s condition and market value.

Because these factors can vary greatly, if you think you might want to purchase at the end of the lease, it’s generally best to avoid an open-end lease to steer clear of conflict and an unexpectedly high selling price.
Many details to consider
Equipment rental/leasing can serve as a cost-effective alternative to buying construction equipment. Yet these arrangements include many details that demand careful due diligence to avoid costly surprises during or at completion of the rental or lease term. And, of course, there are tax advantages to buying that could be worth a look, including recent extensions of depreciation-related tax breaks such as the increased Section 179 expensing deduction and the 50% bonus depreciation provision.

Find out how our expertise in construction accounting can add value to your business. Email us or call us at 1 (888) 875-9770.

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