There are three ways to get the office equipment your business needs into your office: lease, buy, or dollar buyout. There are pros and cons to each approach.
Copier leases can also be a little tricky to understand. To add another layer of complexity, the laws governing leases are changing with new rules going into effect for all businesses in 2019.
To get the best value for your business, you need to know the major differences between a Fair Market Value (FMV) lease, Dollar Buyout ($1 out), and simply purchasing your copiers, printers, and/or imaging equipment outright. Read on to understand these differences and what they mean for you.
Fair Market Value (FMV) Lease
Otherwise known as an operating lease, a FMV offers the lowest monthly payment because, technically, you don’t own the equipment. This lease type is similar to renting over a fixed time period. The equipment leased via FMV may not be considered an asset on your company’s balance sheet. This finance option often has lower monthly payments than other methods because you are not paying for the full price of the device until (if) you choose to keep it at the end of the lease term.
When the lease ends, there are many options for what to do next. You can purchase the equipment for a price the leasing company deems “a fair market value,” a number that is unknown to you until the buyout is generated. You can also return the device to the leasing company if you no longer wish to use it or continue to pay for use of the device based on the lease terms.
- Removes the fear of product obsolescence
- Can return the device at the end of the lease
- Reduced cost of the equipment
- Don’t have to worry about proper disposal at the end of the lease
Dollar Buyout ($1 Out) Lease:
Also known as a capital lease, a $1 out is a good choice if you wish to own the device at the end of the lease and will hang on to the equipment for an extended period of time. The monthly payments are higher than with a FMV lease, but when the lease is over, you only pay $1 to satisfy the terms.
Nonprofits benefit from this option. In a FMV lease the leasing company owns the equipment. In a dollar buyout the lessee owns the equipment. If you were a nonprofit in a FMV lease, you will most likely have to pay for the taxes on the device since the finance company doesn’t get your tax benefits. If you lease through a $1 out, the equipment is considered yours and all the tax benefits you receive will be applied to the equipment.
- Able to purchase the device for a fixed prince ($1)
- Has the benefits of ownership without the upfront capital outlay
Buying the device without a lease has some benefits as well. You will pay only once for the equipment and will not have to budget a monthly payment. With a lease you end up paying more for a device than if you were buying outright, sometimes 1.5 to 2 times the actual cost of the equipment. This can be a lot of money depending on the device and/or the number of devices in your office. You are also not in a fixed term when you purchase, you can keep the device for as long or as short as you wish to without any legal backlash.
Changes in Leasing Practices and Topic 842
There are some major changes coming to the leasing industry that will affect the copier industry and managed print solution providers. The terms known today are operating and capital. Diffen.com explains these lease types as follows:
Operating lease are treated like renting -- payments are considered operational expenses and the asset being leased stays off the balance sheet. In contrast, a capital lease is more like a loan; the asset is treated as being owned by the lessee so it stays on the balance sheet. The accounting treatment for capital and operating leases is different, and can have a significant impact on taxes owed by the business. A capital lease is called a "finance lease" by the IFAC.
These names will be changing to operating (this one stays the same) and finance with both appearing on the balance sheet (unless the term is 12 months or less).
Besides the fact that both leases must now be on the balance sheet, there are some other noteworthy changes:
- Lessor’s requirement to assess the collectibility of lease payments
- Lessees will recognize a lease liability and a right-of-use asset
- If the lease is 12 or less months, a lessee may elect not to recognize a lease assets and lease liabilities. Instead, the lessee would recognize the lease expense on a straight-line basis over the lease term
This will have an impact on the income statement. Finance leases will involve separate income statement recognition of interest expense over the lease term. Amortization of the asset will be similar to amortization of other long-lived assists.
There will some impact on your statement of cash flow as well. Cash flow related to the lease liability for financing leases will be reflected in the financing section of the statement of cash flows. Payment of interest and variable lease payments will appear in the operating section. Also, all cash payments related to operation leases will be reported in the operating section of the statement of cash flows.
Topic 842 requires the separation of lease and non-lease components. This will mean that a copier dealer or managed printer provider will no longer be able to combine the lease and maintenance agreement into one payment. Topic 842 will finally give you a clear picture into exactly how much you are paying for your copier and how much you are paying per page instead of either guessing or taking your copier dealers word for it. Be sure to be on the lookout for what is known as escalators in your maintenance agreement. These can increase the cost of your maintenance agreement up to and over 10% each year and will no longer be able to hide in the lease.
Topic 842 will be effective December 15, 2018 for public entities and December 15, 2019 for other entities. Early adoption will be permitted.
Questions on your current copier lease or looking for more information?