Blaw 3202 Ch. 9: Leases

CHAPTER 9

OF LEASE

Lease contracts, unlike sales and donations, do not transfer title to property. Lease agreements provide for the use of property by someone, other than the owner, for a period of time. Leases for the use of immovable property such as, farm land, houses, apartments and buildings have long been widely accepted. Historically, the leasing of moveable property was not as common. In the past few decades however, the utilization of lease agreements for movables has expanded enormously. It is now possible to lease, rather than purchase, almost any type of moveable property. Automobiles, office equipment and furnishings are just some of the examples of items that are now commonly offered for lease.

LEASE OR SALE

A business normally needs equipment. Should this equipment be purchased or leased? There is no easy answer to this question. A number of factors may have to be considered in each particular case to determine which contract, sale or lease, would be best for the business. Financial and tax consequences are some of the issues that usually influence the decision.

As a general rule, a lease of equipment will initially be less of a financial strain on a business than a sale. If the equipment is leased the business will not be forced to use a larger sum of capital for the purchase price nor will it be required to go through the steps of obtaining a loan. An obvious downside to a lease, as opposed to a sale, is that the business will not acquire any equity or ownership in the leased property with the lease payments. Any rights of the lessee with respect to the property is terminated at the end of the lease term.

Tax consequences should be considered when making the decision as to whether equipment should be leased or purchased. If the equipment is leased the business will "write-off", for tax purposes, the entire monthly rental as a business expense. If the equipment is purchased the cost will be capitalized and...