RV PRO

May '16

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80 • RV PRO • MAY 2016 rv-pro.com ness owners for leasing are the ability to have the latest equipment, consistent expenses for budgeting purposes, help in managing company growth and no down-payment. Leasing offers real advantages, including reduced cash out- flows and greater control. But that's not all. A short list of leasing advantages includes: • Conventional bank loans usually require more money upfront than leasing. • Leasing generally requires only one or two payments upfront in lieu of the substantial down-payments often required to purchase equipment. • Unlike some financing options, leasing offers 100 percent financing. That means an RV business can acquire essential equipment and begin using it immediately to generate rev- enues with no money down. • Best of all, the full amount of the equipment, as well as service or maintenance can be included in the lease. This spreads the cost over the term of the lease, freeing up cash flow for the RV business now, when needed. • Leasing provides a hedge against technology obsolescence by allowing a business to upgrade its equipment at the end of the leasing term. • Operating lease payments are generally treated as fully deductible business expenses. Obviously, a tax professional should be consulted to determine what percentage of leases can be deducted under the new guidelines and the advice of an accountant for help phasing in the new leasing guide- lines also may prove valuable. Buying Into Purchasing Ownership and tax breaks m a k e b u y i n g e q u i p m e n t and other business property appealing, but high initial costs mean this option isn't for everyone. On the one hand, lease or rental payments are, of course, usually fully deductible. With a purchase there are addi- tional tax breaks. Section 179 of the Internal Revenue Code, for example, allows the RV business to fully deduct the entire cost of some newly purchased assets in the first year. In 2016, the operation can deduct up to $500,000 of the cost of pur- chased equipment (subject to a phase-out if more than $2 mil- lion of equipment is placed in service in any one year). And, there is also the newly resur- rected "bonus" depreciation that allows an immediate write-off of 50 percent of equipment purchases. If all else fails, any remaining portion of those costs can be depreciated. The Nuts & Bolts In addition to making balance sheets larger, the new guidelines will change income statements for many RV businesses. Currently, a business that leases equipment for $1,000 a year for five years would show a $1,000 expense each year. Under the new guidelines, that business would show a larger expense in early years and a smaller one in later years. That is because the accounting would be similar to a situation where the business had borrowed money to purchase the asset, paying off the loan in equal payments over five years. In early years, the interest expense would be higher than in later ones. Another significant change will mean that most real estate leases will be accounted for differently. While they, too, would go on the lessee's balance sheet, the value would be based on the expected lease payments over the life of the lease. The lessee would not, fortunately, have to assume that it would exercise renewal options – unless those options were so favorable as to clearly give it a financial incentive to renew. In cases where the lease payment is based on something that will vary – like a showroom lease where the lessee pays a fixed rate plus a percentage of sales – the value would not have to reflect the expected additional payments. That would keep the asset value, and the related debt, lower than it might otherwise be. If, however, the rent would vary based on an index – like the Consumer Price Index – the initial value would be based on the Even with the new accounting rules for leases, they still offer a number of potential advantages vs. buying, including requiring less money due upfront and the fact that they can still be treated as fully deductible business expenses.

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