In our economic uncertainty, does leasing look as attractive if Congress and the President sign and pass an economic stimulus package for businesses?

Lease or buy? This old quandary reemerges in a different form in 2008 because our economy seems stagnant and our government seems stalled (at least for today).

Investing in automation and training has proven to yield high returns on investment. As a result, many businesspeople feel comfortable with annual outlays for new equipment, software and more to achieve greater productivity and reduce costs. And with the startling cost hikes for energy and some materials last year (ongoing), technologies to reduce these frustratingly terrible twins belong as additions on a list of productivity-boosting products.

The choice between leasing and buying changes the cost structure along with the degree of risk. Traditionally, leasing involved minimal up-front cost but “leasing is almost always more expensive than purchasing,” says ExpertBusinessSource.com. With this, though, comes the avoidance of the risk of holding a piece of capital equipment that could be difficult to sell on short notice if the demand for a company’s product(s) falls below expectations.

The leasing option has taken root firmly. “By the mid-1990s in the United States, leasing was the most common way to finance plant and equipment for manufacturing companies,” notes ReferenceforBusiness.com.

Some of the benefits of leasing via GlobexCapital:

• Permits retaining working capital except for minimal initial cash outlay;
• 100 percent financing;
• Preservation of credit standing;
• Terms can range from 12 to 60 months;
• Hedge against inflation;
• Tax advantages (deductible business expense) (IRS Section 179); and
• Permits avoidance of obsolescence (a major point).

Expanding on the tax advantage, a firm that leases equipment “will be able to deduct its lease payments from its taxable income immediately rather than deducting the cost of purchasing equipment as depreciation over time,” adds ReferenceforBusiness.com. Clearly, leasing allows a company to delay a commitment to capital equipment.

One significant disadvantage of leasing is the obligation “to make payments for the entire lease period even if you stop using the equipment, unless you pay an expensive termination fee,” says ExpertBusinessSource.com.

While many companies will lease or buy capital equipment on their short list to automate, they may have a harder time deciding on the second-tier items that would be great to install but could break the company’s budget. If Congress and the Administration cooperate and give the order to print more dollars, then what might be on the table for business?

Although an economic stimulus package was blocked by Republicans last night, it could rise again. The proposed package might help business directly to make major investments in their enterprises this year.

The program that stalled last night was some $40 billion more than a program approved overwhelmingly by the House a week ago after President Bush, House Republicans and Speaker Nancy Pelosi reached quick agreement. The agreement “would save businesses approximately $50 billion in near-term taxes through a temporary change to the tax code that will allow American businesses that buy new equipment this year to deduct an additional 50 percent of the cost of their investment in 2008,” according to the White House summary of policy initiatives. Under last week’s approved program, buying equipment, software and tangible property this year would dramatically lower companies’ taxes. (The agreement also would have increased expensing for small businesses.)

Some in Congress had suggested “a tax incentive in the Senate package, allowing businesses to deduct losses from up to five years ago, rather than just two years in the current law,” said The New York Times. And Senator Chuck Grassley (R – Iowa) noted “the last piece of this compromise is an expansion of the investment incentives to seamlessly extend investment incentives for wind, biomass and other renewable energy projects,” in a statement.

Senator Grassley isn’t the only one pulling for a boost for American businesses. John Engler, the president of the National Association of Manufacturers (NAM), recently said of the economic stimulus package (via The St. Petersburg Times):

There are some provisions that are beneficial in the short term for business and manufacturing. Accelerated depreciation would be helpful allowing companies larger depreciation on capital investment. We would like to see something in net operating losses (where a company can carry losses to a profitable year).

Stimulus package or not, the business investment forecast calls for slowing, according to NAM’s Outlook for the U.S. Economy and Manufacturing January 2008: “Business spending on equipment and software is expected to grow by a moderate 4.1 percent in 2008, as solid 6.7 percent growth in information processing equipment is offset by a more modest 2 percent growth in industrial equipment.”

One aspect that Congress and the President agree on is that for the stimulus package to work, it must start soon. Perhaps the differences are not so much about injecting money into the economy as about how much. The numbers bandied about range from $150 billion to $204 billion with the latest number at $158 billion. For business incentives — which clearly should stimulate investment in equipment — the numbers range from $42 billion to $50 billion.

Are you betting on a boost for business?

Earlier: State of the Union ’08: The Biz Perspective

Resources

Senate Stimulus Measure Blocked
by Jonathan Weisman, Paul Kane and Juliet Eilperin
The Washington Post, Feb. 7, 2008

The Benefits & Risks of Buying vs. Leasing Business Equipment
by Don Blank
ExpertBusinessSource.com, March 31, 2007

Leasing
ReferenceforBusiness.com

Senate Democrats to Push Expanded Stimulus Plan
by David M. Herszenhorn
The New York Times, Feb. 6, 2007

Grassley: Senate Stimulus Bill Improves upon House Bill
Senate.gov, Jan. 31, 2008

The Outlook for the U.S. Economy and Manufacturing January 2008
National Association of Manufacturers, January 2008