Faced with some of the most challenging economic conditions ever, manufacturers of all types and sizes are looking for new ways to improve their bottom line.
Between now and the end of the year, you may want to consider the benefits of equipment financing and the capital equipment provision in the Economic Stimulus Act of 2008 as you strategize how to generate sales and increase profitability. As equipment wears out and maintenance costs increase, the need for replacement equipment and the timing of that acquisition is an important business decision.
Despite the current economic climate of rising fuel and raw materials costs and decreasing consumer spending, now just might be the best time to invest in equipment.
Economic Stimulus Act
Most people are familiar with the portion of the Economic Stimulus Act of 2008 aimed at increasing consumer spending that included sending checks to taxpayers. However, the act also includes some lesser-known benefits to companies acquiring capital equipment before the end of the year.
Similar to the stimulus provisions enacted after Sept. 11, 2001, this new stimulus package was signed by President Bush on Feb. 13, 2008, with some key provisions that expire on December 31, 2008.
Benefits of the Economic Stimulus Act include allowing companies purchasing new equipment before the end of the year to take an additional 50% first-year depreciation for tax purposes.
This means manufacturing companies needing to upgrade or purchase new equipment -- anything from assembly machinery to commercial vehicles to office equipment -- are eligible for the regular modified accelerated cost recover system (MACRS) depreciation they typically use to depreciate new equipment, as well as the additional first-year 50% depreciation.
Manufacturers who prefer to lease equipment can also take advantage of this tax change because the benefit passes through to the leasing company, who in turn can offer lower financing rates to lessees.
IRS Section 179 offers another temporary tax change that increases the amount of money small businesses can write off on equipment purchased before the end of the year.
Under this section, companies purchasing up to $800,000 (up from $510,000) in capital equipment can write off $250,000 (up from $128,000) of that investment on equipment purchased through Dec. 31, 2008.
Both these provisions effectively lower the stated profits on a manufacturer's income statement, thereby lowering its tax burden.
And because both apply only to equipment purchased this year, it makes smart business sense for many manufacturers to purchase equipment now that they may have been planning to acquire in the future.
Financing Adds to Possibilities
With equipment leasing, manufacturers can obtain everything from machine tools to injection molding machines to printing presses and assembly lines while conserving cash for use in revenue-generating projects.
Leasing is one way for plant managers to acquire new equipment or upgrade existing equipment and avoid the headaches of obsolescence, and leasing also means manufacturers can postpone the ultimate purchase decision for a piece of equipment until the end of the lease.
Cash flow management is particularly important during an economic slowdown. With leasing, manufacturers can acquire machinery and processing equipment based on their operating, not capital, budget, which can be a major benefit since the lease payments can be closely matched with revenue generation.
Additional benefits include:
- Tax treatment -- The IRS does not consider certain leases to be a purchase, but rather a tax-deductible overhead expense. Therefore, manufactures can deduct lease payments from income.
- 100% financing -- Since a lease often does not require a down payment, it is equivalent to 100% financing.
- Immediate write-off of the dollars spent -- With leasing, payments are treated as expenses on the income statement, so equipment does not have to be depreciated over an extended term.
- Flexibility -- As businesses grow and needs change, the lessee may be able to add or upgrade equipment at any point during the lease term.
- Asset management -- A lease provides the use of equipment for specific periods of time at fixed payments. The leasing company assumes and manages the risk of equipment ownership. At the end of the lease, if the customer elects to return the equipment, the leasing company is responsible for the disposition of the asset.
- Improved cash forecasting -- A manufacturer can more accurately forecast the cash requirements for equipment since it knows the amount and number of lease payments required.
- Flexible end of term options -- There are typically three flexible options at the end of a term. The lessee can return the equipment, purchase the equipment from the leasing company or extend the lease for an additional period of time.
- Tax benefits -- Leasing companies can pass the tax benefits of ownership on to the businesses in the form of lower monthly payments.
Offer Leasing To Your Customers, Too
In addition to taking advantage of flexible financing for the equipment you need to remain competitive, many manufacturers also offer a finance option to customers, as well. Offering one-stop-shopping for products and financing can help provide a strategic, competitive advantage, particularly during a tough economy.
Specifically, offering an equipment finance program can help manufacturers:
- Generate larger, more profitable sales faster;
- Increase account control;
- Improve sales efficiency and productivity;
- Improve cash flow;
- Convert rental customers;
- Differentiate your company from its competition;
- Provide complete solutions for customers; and
- Control the after-market of used equipment.
Regardless of whether you're considering leasing equipment or offering a finance program to your customers, its important to choose your finance partner wisely. Look for a reputable finance company with experience in your industry and service levels to meet your needs.
Even in the most challenging of economic times, one thing is certain. With guidance of an experienced and reliable financing partner, manufacturers will be in the best position to explore all avenues -- whether leasing or utilizing the tax benefits of the Economic Stimulus Act of 2008 -- on the way to meeting exceeding their business goals.
NOTE: Both provisions of the Economic Stimulus Act have specific guidelines and criteria. Customers should consult their tax advisor for more information on how their business can take advantage of the Economic Stimulus Act.
Ken Turner is senior vice president of Key Equipment Finance's direct sales group. Key Equipment Finance is one of the largest bank-held equipment finance companies in the U.S. http://www.kefonline.com