Should I Lease or Buy?
New Tax and Accounting Rules Add Complexity

https://news.bloombergtax.com/financial-accounting/insight-should-i-lease-or-buy-new-tax-and-accounting-rules-add-complexity-1

I ate dinner in a Chinese restaurant yesterday and cracked open my fortune cookie. The advice on the little white piece of paper said: “It is a wise man who knows whether it is better to lease or buy.” This is even truer today given that operating leases are capitalized as an asset and liability under the Financial Accounting Standards Board’s Topic 842 and the 2017 Tax Cuts and Jobs Act changes the tax benefits of borrowing in the buy scenario. I contend that it is almost always better to lease assets than to buy them.

This article will analyze the reasons why companies lease and demonstrate how choosing the right lease product and structure can result in improved financial results, most notably cost of capital (COC), earnings per share (EPS), return on assets (ROA), and return on equity (ROE).

The messages of this article are:  First, a traditional lease versus buy analysis is the necessary first step in deciding whether you, the lessee, should be the tax owner or not in the financing of the use of a business asset, and it used to be all that you needed to do when operating leases were off-balance sheet.  BUT, second, and more importantly now, I suggest a “new” analysis is needed that is a pro forma financial presentation analysis using a present valued ROA calculation to determine what structure is best to enhance the financial presentation of the transaction for your company.  The cost of capital of the lease versus buy should be calculated and compared.  The old adage “you are how you are perceived” is the issue.  Your investors’ and lenders’ perception is what counts, so choose the structure that improves the financial ratios and measures that are drivers for your business.