RV PRO

September '14

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98 • RV PRO • SEPTEMBER 2014 rv-pro.com percent. Borrowing money also may tie up lines of credit, and lenders may place restrictions on the RV business's future financial operations to ensure the loan will be repaid. • Obsolete equipment: While owner- ship is perhaps the biggest advantage to buying equipment, it also can be a tremendous disadvantage. Purchasers of high-tech equipment run the risk the equipment may become techno- logically obsolete and they may be forced to reinvest in new equipment long before planned. Certain types of equipment have very little resale value. A computer system that costs $5,000 today, for instance, may be worth only $1,000 or less three years from now. Tax Strategies In the eyes of the IRS, whether a leasing transaction is treated as a "lease", or treated as a "purchase", determines who will be entitled to deductions for expenses such as depreciation, rent, and interest expenses. Generally, when it comes to deter- mining who owns the property for tax purposes, and thus who is entitled to the depreciation deductions, the IRS looks to the "economic substance" of the transac- tion – how it is structured and works – not how the parties involved characterize it. Lease or rental payments are, of course, usually fully deductible. With a purchase, Section 179 of the Internal Revenue Code allows the RV business to fully deduct the cost of some newly purchased assets in the first year. In 2014, the operation can deduct up to $25,000 of equipment (subject to a phase-out if more than $2 million of equipment is placed in service in any one year). Although not all equip- ment purchases are eligible for Section 179 treatment, the operation can still receive tax savings for almost any business equip- ment through depreciation deductions. Fortunately, there are no time limits on leasing. That means leasing can be effective where an RV business already has purchased equipment. ese transac- tions, known as sale-leasebacks, are usu- ally available for equipment purchased within the past 90 days. Sale-leasebacks also may be used to legitimately shift the tax benefits from the RV business to its new owner or owners. Equipment or property that is already on the operation's books can be sold to the owner/shareholder – or to key employees – and leased back to the business. Because these self-rental transactions involve shifting tax benefits from the business to its owners/shareholders, they should be "arm's length" transactions and the parties aware of possible IRS scrutiny. Changes in the Wind As proposed, the new rules would rep- resent a major change in how most busi- nesses account for the cost of leases by requiring vastly larger amounts of assets and liabilities to be reported on an oper- ation's books. Under current rules, RV manufacturers, distributors and dealers are generally able to classify many leases as "operating leases" and keep them off their balance sheets. This so-called "off-balance-sheet financing" can make a business look less indebted than it really is. e proposed lease accounting rules would, however, require many businesses to add to their balance sheets all but the shortest leases, as liabilities akin to debt. e proposal also would set up a two- track system for how lease costs should be reflected in the operations' earnings. Costs of real-estate leases would be rec- ognized evenly over the term of the lease, while costs of other leases would be more front-loaded and would decline over the lease term. Should these accounting standards be adopted as proposed, it is the banks and other lending institutions that would be affected first and hardest. With lenders forced to increase their capital and new restrictions on the sources of funds those institutions rely on, leasing might face a tighter market and become far more expensive. In all likelihood, there will be a con- siderable delay in making the new rules effective, probably until 2017. is would give RV businesses time to comply and, in some cases, to renegotiate loan agree- ments. e many businesses that currently have borrowing limits and/or restrictions placed on them by lenders and investors could, once leases must be included on the RV operation's balance sheet, be in violation of those agreements. Analyze This Every RV business owner, operator, or executive can analyze the costs of leasing versus purchase with a so-called discounted cash flow analysis, comparing the cost of each alternative by considering: the timing of the payments, tax benefits, interest rates on a loan, the lease rate, and other financial arrangements. Unfortu- nately, while this sort of analysis is useful, the lease/buy decision can't be made solely on cost analysis figures. Generally, RV businesses with a strong cash position and good financing options often can buy needed equipment outright, or they can borrow to acquire equipment with a long operating life. If obsolescence is a concern, a short-term operating lease often provides the biggest advantage and the most flexibility. If cash flow is an issue and the equip- ment must remain operable for longer periods, a long-term capital lease with a final residual payment will result in lower monthly payments, plus a purchase option. However, short-term savings may result in higher costs over the entire leasing period. is is especially true with a finance lease where the user can purchase the equipment at the end of the lease. e RV business may end up paying more over the long term. Obviously, it pays to determine any end-of-lease costs beforehand. Furthermore, although taxes play a role in whether to lease or to purchase, they should not be the deciding factor, either. Given that data suggests roughly eight out of 10 businesses lease some equipment, would your RV business reap the long- term benefits of a lease?

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