If You Have All the Money in the World, Why Lease?
If you made it through the holidays without seeing the movie “All the Money in the World,” I’d recommend it. The movie also came out as Congress was wrestling with the Tax Cuts and Jobs Act of 2017, which now has significant impact on taxes and businesses that lease equipment. It’s based on a true story of the 1973 kidnapping of billionaire Jean Paul Getty’s grandson, Paul. The connection between these two rests in Getty’s astute, if not maniacal use of the rules to get ahead in business.
Jean Paul Getty made big bucks in oil, and was so squeaky tight with money that he squeezed out only part ($2.2 million) of his grandson’s ransom because it was the maximum amount that was tax deductible. And that was after the kidnappers lopped off little Getty’s right ear. And he loaned his son about $1 million to cover the rest of the ransom--at 4% interest!
Now, I’m not a huge fan of J. Paul Getty’s life skills or apparent lack of compassion, but the guy deserves some kudos for his shrewd business sense and fanatical attention to the bottom line. In short, you can’t fault him for his business and financial mind.
J. Paul Getty liked favorable tax treatment, and loved fair market value leasing. In fact, Getty once said, “Lease that which depreciates. Buy that which appreciates.” That’s a valuable little chestnut even the smallest proprietor can bank on. If you want to own the equipment, there’s also a new break you should really be excited about. In the new law, it’s not widely known that the tax breaks—and Section 179 and 100% Bonus Depreciation (Section 168) —also apply to businesses who lease their equipment. When you buy new or used equipment to run your business under a $1 purchase option lease or Equipment Finance Agreement (EFA), you can deduct 100% of it in the first year, just using the Bonus Depreciation, which essentially eclipses the benefits of Section 179. A $1 purchase option lease or EFA is considered a purchase under the Internal Revenue Code. Your tax advisor can confirm how you may benefit from this tax break.
Getty probably enjoyed the latest technology, and leasing benefits allowed him to trade up every few years without losing the cash outlay he would have put down to buy equipment. And he most likely figured out early that bank loans required more hoops to jump through and were tied to credit history. Maintenance work is often included in a lease agreement, and Getty wouldn’t think of hassling with the responsibility of keeping his technology or machines in running order himself.
When you choose to make your equipment purchase over time, it really pays for itself and helps your cash flow. Take it from J. Paul Getty: Even if you have all the money in the world, it still makes solid business sense to lease!
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