The ins
and outs of equipment leasing
Leasing has gained popularity as a financing alternative for
funding the equipment needs of many businesses. You can lease
virtually anything — from manufacturing tools to office
communication devices, computers, furniture and more.
How it works
With a lease agreement, a monthly usage fee is paid to a
lesser — a finance company, bank or other firm — that retains
ownership of the equipment. At the end of the lease, you may
purchase the equipment at market or a discounted value.
Canceling a lease early can lead to hefty penalty fees.
Many business owners find that leasing helps them effectively
manage asset costs, increase operational flexibility and
reduce the risk of asset ownership. And while leasing
represents a liability, it’s not viewed as debt. This is an
important factor when applying for a loan or credit.
Leasing strategy is key
Leasing does present some challenges. It adds to the overall
complexity of asset management, especially if you have
numerous agreements to manage. For example, approving just one
contract can take weeks because you’ll need input and approval
from corporate lawyers as well as financial, tax and insurance
specialists.
Mismanaging leasing arrangements can pose financial risks,
such as inefficient allocation of resources, and inconsistent
and unfavorable lease terms. Because of the Sarbanes-Oxley Act
of 2002, issues may arise with capturing and documenting
details about lease obligations and properly characterizing
and reporting them as off-balance-sheet transactions and
commitments.
You can overcome these challenges with a three-pronged leasing
strategy designed to improve efficiency and streamline
administration:
-
Use an
automated lease management or contract management system to
enhance your understanding of leasing activity across all
your business units and departments. This will help you
efficiently track assets and their contract expiration dates
and renewal options as well as negotiate better terms and
pricing.
-
Keep
abreast of ever-changing business needs by integrating your
lease management system with your company’s enterprise
resource planning and other systems and tools.
-
Leverage
technology, such as wireless global positioning systems and
radio frequency identification tags, for locating, tracking
and managing leased equipment to ensure effective use of
resources and return of equipment at the end of a lease.
Keep in mind
that enforcing companywide standards and procedures helps
ensure consistent and favorable lease terms.
Leasing vs. buying
Leasing may offer a great financing alternative, but how do
you know if it’s really better than buying equipment outright?
Making the right decision starts with comparing the two
options in terms of associated funding and tax expenses, and
residual value. Other factors to consider include:
Cash flow. If you need to preserve cash, leasing
requires a lower initial cash outlay and allows you to spread
out your equipment investment over time. Also, while a
security deposit may be required, leasing often doesn’t
require a down payment.
Financial options. Ordering new equipment may be
easier, as leasing also often provides the option of expensing
monthly rental fees vs. depreciating equipment costs.
Latest technology capabilities. If having
state-of-the-art equipment is a requirement for your business
to successfully compete, then leasing may be the answer.
That’s because you can upgrade technology capabilities as
needed, without worrying about selling off or donating
obsolete equipment.
Enjoy more value
Leasing may be a more cost-effective choice over buying when
cash is tight, financing for purchases is difficult to obtain
or your long-term business needs are uncertain and subject to
change. By developing a well-conceived leasing strategy, you
can minimize associated complexities and costs and maximize
the potential benefits for your operations.
Back to top
Coming soon to a family near
you
The Working Families Tax Relief Act of 2004 was a $146 billion
tax cut package that extended a number of tax breaks for
individuals. These included accelerated tax cuts from the 2001
and 2003 tax acts that were scheduled to expire at the end of
2004. Without these extensions, many individual taxpayers
would have seen a significant jump in their 2005 tax bill.
The law also includes a new uniform definition of “child.” The
new definition will apply throughout the tax code and, it is
hoped, will eliminate the confusion over who qualifies as a
child for a variety of deductions and credits. Additionally,
the new law reinstated and extended several expired business
incentives. (See “Business highlights of that ‘other’ tax law”
in this issue.)
Extended through 2010
Child tax credit. Previously scheduled to drop
to $700 in 2005, this credit will remain at $1,000 through
2010, providing relief to the many taxpayers who have come to
depend on this tax break.
10% income tax bracket. The 10% tax rate will
continue to apply to amounts up to $14,000 for married
couples, $7,000 for singles and $10,000 for heads of
households. Indexed for inflation, these amounts will be
adjusted annually.
Marriage penalty relief. Married taxpayers
filing joint returns will continue to receive the benefit of
the 15% tax bracket and the standard deduction at twice the
amount allowed for singles. This doesn’t eliminate the
“penalty” for higher two-income couples, but does lessen it.
Extended through 2005
AMT exemption. The expanded alternative minimum
tax (AMT) exemption amounts of $58,000 for married couples
filing jointly and $40,250 for singles were scheduled to
decrease in 2005. Now available through 2005, these exemption
increases of $9,000 for a joint return and $4,500 for a single
return will continue to lessen the AMT’s bite.
Other tax breaks that have been extended through 2005 include
allowing nonrefundable personal credits, such as the Child and
Dependent Care, education and Child Tax credits, to reduce AMT
as well as regular tax; an above-the-line deduction of up to
$250 for teachers; and contributions to Archer Medical Savings
Accounts (MSAs).
Back to Top
How to address poor employee
performance
Not all employees are star performers. So if an employee
exhibits marginal or poor performance, is he or she just a
bad worker? Not necessarily.
Performance blasters
Employee performance may lag for a variety of reasons. For
example, the worker may be:
-
Lacking needed technical skills
and knowledge
-
Overwhelmed due to inexperience
-
Struggling with project or time
management
-
Dealing with personal issues
-
Suffering from a physical or
psychological health problem
-
Abusing drugs or alcohol
Rather than make assumptions,
candidly express your concerns and give the individual an
opportunity to explain. Then work with the employee in a
positive, constructive manner to chart a performance
improvement plan. Also ask what you, as a manager, can do to
help.
Strategies for shining performance
In many cases, performance issues can be resolved through
on-the-job coaching; training courses, educational seminars
and workshops; and job aids or other self-help tools.
If these strategies fail, then reassess whether the
individual’s skills would be better suited to a different
role in your company. For non-work-related performance
factors, recommend counseling and provide information about
employee assistance, substance abuse or other company
program resources. Termination should be your last option.
Performance rating reviews
Poor performance can also be the result of not fully
understanding job responsibilities and company expectations.
For every employee level, establish a formal review process
that makes the following clear to the employee:
-
Overall purpose of his or her
job
-
Specific responsibilities and
priorities
-
Goals and expectations
-
Performance metrics and
standards
Many employers believe an annual
review is sufficient. This approach, however, doesn’t allow
any opportunity for employees to improve before annual
decisions are made regarding their advancement, compensation
or other rewards. Rather, feedback should be documented and
communicated periodically throughout the year.
To eliminate employee concerns about bias and confirm that
you’re addressing the most important performance issues,
consider soliciting input from employee business associates
and customers. You should also consult a human resources
professional or attorney to ensure you’re following
appropriate review procedures.
Good for everyone
In the end, approaching your employees from a point of care
and concern for their success and well-being can go a long
way toward improving their performance and, thus, your
business’s bottom line.
Back to Top
A fairy tale come true?
Strategies for shifting income to your children
Once upon a time, parents could save a lot in taxes by
shifting income to their kids. They would transfer stock or
other taxable investments to a custodial account in the
child’s name and the earnings would be taxed at the child’s
lower tax rate. Then Congress passed the “kiddie tax,” making
it harder to benefit from this strategy. Still, if you do a
little planning, you can implement other strategies — such as
hiring your kids or opening a 529 plan for them — to reduce
your family’s tax bite.
The kiddie tax
The kiddie tax eliminated the tax advantages of shifting
income to children under 14. This year, their first $800 in
unearned income (such as interest, dividends and capital
gains) is tax-free. Their next $800 is taxed at their rate,
usually 10% or 15%. But any unearned income over $1,600 is
taxed at their parents’ marginal rate.
For children age 14 or older, unearned income is taxed at
their own rates. But the benefits are still limited,
especially now that qualified dividends and long-term capital
gains are taxed at a top rate of only 15% (5% for the two
lowest tax brackets).
Suppose you give your 14-year-old $100,000 in stock earning an
8% rate of return. (You must file a gift tax return, which
will use some of your $1 million lifetime gift tax exemption.)
If you transfer the stock to a custodial account under the
Uniform Gifts to Minors Act or the Uniform Transfers to Minors
Act, you can retain control until your child reaches the age
of majority — age 18 or 21 depending on your state’s law.
The stock earns $8,000 a year in dividends and long-term
capital gains, for a tax of $1,200 at your rates (15%).
Assuming your child is in the 15% tax bracket, the income
would be taxed at a 5% rate, for a tax of $400. In other
words, you save $800 in taxes. But you may not want to part
with $100,000 in assets that your child will have unrestricted
access to in a few years for this small amount of tax savings.
Hiring your kids
If you’re a business owner, hiring your kids to work in your
company can allow you to shift income while yielding greater
tax benefits. When you employ your children, you don’t have to
worry about the kiddie tax, which applies only to unearned
income. Plus, you can deduct your children’s wages as a
business expense, and if they’re under age 18 and your
business is unincorporated, you won’t have to pay Social
Security, Medicare or unemployment taxes.
Your kids are also entitled to a standard deduction (currently
$5,000), which means their first $5,000 in earned income will
be tax-free.
Let’s look at an example. Aurora has three children, Cindy,
14, Ariel, 15, and Belle, 16. She hires all three to work
part-time in her unincorporated textile business. Cindy sweeps
the floors, Ariel answers the phones and Belle helps keep the
books.
Aurora pays each child $8,000 per year, contributing $3,000 of
that amount to IRAs she has set up for them. Each child is
entitled to the $5,000 standard deduction and a $3,000
deduction for the IRA contribution. The entire $8,000 is
federal-tax free, and Aurora deducts $24,000 in wages for a
tax savings of $8,400, assuming she’s in the 35% income tax
bracket. Alternatively, Aurora could contribute the $3,000 to
Roth IRAs. The kids would have to pay income tax on that
amount, but the funds could grow tax-free for decades.
When hiring your kids, be sure that they do real work and that
their compensation is reasonable. If you pay your teenager
$50,000 a year for part-time clerical work, the IRS may hit
you with back taxes and penalties.
529 plans
If higher education is in your children’s future, investing in
a 529 plan may be your best option for shifting income. These
savings plans allow you to make significant cash contributions
to a tax-advantaged investment account that’s similar to a
Roth IRA.
Your contributions aren’t deductible, but the funds grow on a
tax-deferred basis and distributions are tax-free if the
beneficiary uses them to pay for qualified higher education
expenses (including tuition, fees, books, supplies, equipment,
and room and board). Nonqualified distributions are subject to
income tax plus a 10% penalty.
Remember that some of the 529 plan’s advantages are set to
expire at the end of 2010, unless Congress extends them. For
example, starting in 2011, distributions used for qualified
higher education expenses will be taxed at the beneficiary’s
tax rate, which will likely be lower than your own.
Tax strategies with a happy ending
Unfortunately, there is no magic wand to reduce your tax bill.
Shifting income, employing your children in your business and
opening a 529 plan are just a few strategies that can give you
a happy ending.
Back to Top
Tax Tips
Get tax relief from summer day camp
Like many parents, you may send your children to day camp
during the summer. But did you know you can receive a tax
break? Day camp is a qualified expense under the Child and
Dependent Care credit, which is worth 20% of qualifying
expenses (more if your income is less than $43,000), subject
to a cap. In 2005, the maximum expense allowed is $6,000 for
two or more qualifying persons with a limit of $3,000 for
one qualifying person.
Although overnight camp costs do not qualify for the credit,
the cost of having a sitter watch your children in your home
while you and your spouse work, or look for work, may.
Sharing your gains
To defer capital gains taxes, you can deduct charitable
contributions of appreciated long-term stock by creating a
charitable remainder trust (CRT). A CRT provides you with an
annual income stream, plus it can sell the securities.
The benefit? You incur no capital gains taxes at the time of
the sale. In effect, you receive an annuity based on the
security’s fair market value at the contribution date and
pay taxes only as you receive distributions. You also can
receive a current income tax deduction for the remainder
expected to benefit the charity, as determined by IRS
tables.
By funding a CRT at your death, you can reap estate tax
benefits. Income from the trust will go to a beneficiary of
your choosing (rather than to you). When the trust term ends
or the beneficiary dies, the remainder will pass to charity.
Because you will be making a partial charitable donation at
the time of your death, your estate will receive a deduction
for a portion of the trust’s value.
HSA contributions made by partnerships and S corporations
Contributions made by a partnership or S corporation to a
partner’s or shareholder’s Health Savings Account (HSA) are
generally treated as payments to the individual and included
in his or her gross income. Therefore, the IRS considers the
contributions as made by the individual partners or
shareholders and allows them to be an above-the-line
deduction on their individual income tax returns.
Partnerships can approach contributions to partners’ HSAs in
two ways. One approach is to treat them as distributions to
the partner. Contributions are not deductible by the
partnership and aren’t included in the partner’s
self-employment earnings. But if contributions are for
services rendered, you can treat them as guaranteed
payments. Doing so allows the partnership to deduct the
amount. The contributions will be included in the partner’s
net self-employment earnings.
Meanwhile, contributions made on behalf of S corporation
shareholder employees who own 2% or more of the stock are
treated as wages and are not subject to payroll tax. The
business can deduct the cost of the payment.
Back to Top
