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This post discusses leasing/taxes, inflation, & interest.

Required: 6 line reponse to each question.
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My Question:

From a firms perspective, discuss how the following factors may affect the attractiveness of leasing as compared with other financing arrangements:

i) Corporate tax rate
ii) Inflation
iii) Interest Rates.

Solution Preview

i) Corporate tax rate

When a corporation enters into a lease agreement, the full amount of each lease payment is used as a regular operating expense against the corporation's taxable income (usually as equipment rental).

The corporation is able to use 100% of the lease payments against income in the year that the payments are actually made, which lowers current-year taxable income (which the corp. is taxed on at the applicable corp. tax rate).

Corporations that enter into leases can also take advantage of advanced depreciation methods, including using a Section 179 expense.

If the corporation leases the equipment and uses a Section 179 expense, the total depreciation expense, up to the amount allowable by law, drops the corporation's taxable income, in addition to the amount it has dropped from the lease payments (used as operating expenses).

The corporation then pays at the corporate tax rate on a reduced amount of net income by utilizing the Section 179 expense in conjunction with the leased asset, which directly affects the corporate tax rate.

If the corporation chooses to utilize a different method of depreciation, they still benefit from a lowered taxable income. Other methods will also allow the corp. to use a depreciation expense each year, for the life of the asset.

ii) Inflation

Inflation affects the ...

Solution Summary

This solution provides a detailed discussion explaining how the corporate tax rate, inflation, and interest rates can affect the attractiveness of leasing as compared with other financing arrangements. References are also provided.

This solution is written based on 25+ years of professional accounting and finance experience.