US businesses push back on lease accounting change

Here at Mazuma Capital Corp we have been talking a lot about the new lease accounting changes scheduled to be put into effect in 2011.  As a lease originator the big question is how detrimental will this change be on an already wounded economy and struggling industry?  Changes to off balance sheet accounting have been a topic of discussion for quite sometime, but many feel this is the wrong time to implement. The change could ultimately triple debt limits in loan agreements for some companies.

We hear that things are looking up and companies are beginning to hire, yet those in the trenches feel otherwise.  So what will happen to all of the U.S. businesses who currently have significant leases off the books? Is it a possibility for profitable companies to tank overnight due to this change?

It seems that business groups are gearing up to delay proposed accounting rules that would bring hundreds of billions of dollars in leases onto corporate balance sheets, even as backers say the revisions will give investors crucial information. Many companies - with the help of the leasing industry - have avoided putting leases on the books by structuring them to fall below the 90 percent threshold. Such leases are considered operating leases and only require a rental expense on the income statement.

At issue are rules proposed by U.S. and international standard setters. The changes are meant to address complaints that investors are not getting a complete picture of companies' debt because massive lease obligations are relegated to footnotes in financial statements. The changes could cause companies to avoid leases entirely.  The changes will be more complex, forcing many businesses to do things that hinder growth and development.

The lease accounting changes will take a few years to fully take effect, but there will be causalities. What will this mean for the leasing industry that have assisted in growth and profitability for U.S. businesses? The S & P reports that there is at least $549 Billion in lease liabilities lurking off balance sheets. That's $549 Billion that will be off the books one day and on the books the next day.  Here is a little information on what we can expect from businesses that currently use leases from Delta Airlines to McDonald’s.

Financial statements would change significantly at airlines, which lease many of their aircraft rather than owning them. Delta Air Lines, which had about $17 billion in long-term debt at year-end 2009, would see that number jump by roughly $8 billion.

McDonald's Corp, which leases about 14,000 restaurant locations and is a lessor for another 19,000, may have to spend as much as $100 million because of technology and staff resources required for the accounting change, the company said in a letter to rule-makers last month.

The new standards are a joint project of the Financial Accounting Standards Board, which sets U.S. accounting rules, and the International Accounting Standards Board, which sets international standards. The boards are holding public meetings through Jan. 6 before crafting a final rule.

Sources:

S& P

Reuters Business

2011 Looking Bright For U.S. Company Growth and Purchases

Companies are looking to expand and that means new equipment purchases in the near future.  This outlook is bright coming off of two tough years in the equipment leasing industry.  Slow growth combined with economic uncertainty was not a good combination for the leasing industry.  There seems to be a bright light at the end of this tunnel. Forecasts seem promising and the tax benefits for companies to buy are enticing.

Investment by U.S. companies in equipment and software in the third quarter was up 15% from a year earlier to $1.08 trillion, nearly matching prerecession levels, government data show.
Corporations received more incentives to invest Dec. 17, when President Obama signed into law a tax compromise reached by Congress that, among other things, lets companies deduct from taxable income 100% of certain types of investments in 2011.

It seems that big U.S. companies have cleaned up their balance sheets and, appear to be flush with cash.  These U.S. companies are open to using the cash in 2011 on factories, stores and even hiring. Companies worked hard the last few years and especially in 2010 to preserve cash, and are slowly coming around to spending it.  According to Bloomberg Business U.S. companies are turning around and starting to feel comfortable with the economic outlook.

The maker of specialty glass and ceramics is investing $300 million to expand its research and development center near its headquarters in Corning, N.Y., adding about 100 researchers and Ph.D.s. It also is spending $800 million on a liquid-crystal display factory in China and building more LCD capacity in Taiwan.

Engine maker Cummins Inc., meantime, plans to add about 2,500 U.S. jobs in 2011, many requiring engineering or other technical skills. In 2010, Cummins raised its U.S. employment by only 185 people. The company has about 14,800 U.S. employees.

At the end of the third quarter, cash held by 419 nonfinancial companies in the Standard & Poor's 500 list was up 49% from three years ago—before the start of the recession—while total debt was up a more modest 14%, according to an analysis by The Wall Street Journal.
The good news: The improvement in just the past year was even more pronounced: cash was up 10.6% from the 2009 level, while debt grew 2%.

Profits are higher, too, after companies slashed their work forces and closed less-efficient operations. Total U.S. corporate profits in 2010's third quarter rose 26% from a year earlier to $1.64 trillion, the highest in four years, according to government data.

With this stronger foundation, coupled with new confidence about the global economy, corporations are looking to expand.  Continued growth in the mining and energy businesses around the world is expected to fuel a wide range of U.S. companies. IT spending seems to be on everyones mind and will head up the priority spending list this new year.

Source:

Standard & Poors Capital IQ

Bloomberg Business

Wall Street Journal

Companies Brace for Powerful Impact of Lease Accounting Changes

Proposed new accounting standards have been drafted in order to push lease liabilities back onto corporate balance sheets. Such a change would represent a major shift for companies that have typically favored the off-balance-sheet treatment of operating leases, and it could have a significant impact on corporate decisions to lease or purchase real estate in the future.

The proposed guidelines are a joint initiative by the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board to create a uniform global standard and greater corporate transparency in lease accounting procedures. The most recent draft would establish one method of accounting that requires firms to recognize all lease liabilities and assets on their corporate financial statements.

Another key component is that companies would be required to record the lease value or rent commitment over the entire lease term, including renewal options. Although the intent is to stop off-balance-sheet activity, the changes would add significant weight to corporate balance sheets.

For example, a firm that pays $1 million per year in rent for its corporate headquarters would quickly see its liability multiply depending on whether it has a five-year or 15-year lease. Companies would appear more highly leveraged, which could affect factors such as corporate credit and existing debt covenants.

Although FASB cites data that values leasing activity at $640 billion in 2008, other industry sources estimate that current volume as high as $1.3 trillion in operating leases for U.S. firms alone. Once the guidelines go into effect, which many in the industry believe will occur in 2013, both new and existing leases would be immediately affected.

One fear is that the new accounting practices could deter companies from signing long-term leases, or encourage firms to own rather than lease facilities. Both of those factors could be a detriment to the sale-leaseback and net-lease finance niche where leases typically extend 15 years and beyond.

Sale-leaseback transactions have accounted for $24.8 billion, or slightly more than 50%, of the $46.6 billion in single-tenant sales globally over the past 12 months from June 2009 through June 30, 2010, according to Bloomberg Business.

Welcome to the 'New Normal': Modest Investment in Capital Equipment

Banks and borrowers will continue to move tentatively in 2011 before investing big dollars in new machinery, says NEFA's Peretore.

Manufacturers might be getting ready to invest in new equipment, but several signs point to only modest growth in 2011, as questions of financing and confidence moving forward set the stage for a tentative recovery in capital investment.

Just as the market is ripe for first-time home buyers, an overabundance of supply and a dearth of demand have created ripe opportunities for companies to invest in new industrial machinery. But according to Frank Peretore, an attorney who focuses on equipment leasing, and who sits on the board of directors for the National Equipment Finance Association, companies might be stabilizing and the banking industry is returning to health, but that still doesn’t mean large-scale investments are taking place.

What do the Tax Cut Extensions mean for business looking to purchase equipment?

Tax Cut Extension- How It Applies To Equipment Leasing
In December 2010 President Obama signed into law a tax bill extending cuts for all Americans. The benefits range from tax cuts for millionaires and the middle class to longer-term help for the unemployed.
Business will benefit from the 100% expensing provision. For investments placed in service after Sept. 8, 2010, and through Dec.31, 2011, the bill provides for 100% bonus depreciation.
Operators will be able to depreciate 100% of equipment purchased in 2011. The bill also extends increases in the maximum amount and phase-out threshold under section 179, the association added. Under current law, a taxpayer with a sufficiently small amount of annual investment may elect to deduct the cost of certain property placed in service for the year, rather than depreciate those costs over time.
Expensing - One-year 100 percent depreciation. For 2012 Section 179 at $125,000 and $500,000 phase out – alas not continuing the much more beneficial $500,000 and $2,000,000 phase out which is still good for 2010.  According to Joint Tax the provision in general extends the expensing to qualified property placed in service after September 8, 2010 and before January 1, 2012.
 Boost to Section 179 Depreciation
Rather than depreciating business property over several years, Section 179 now allows a taxpayer to expense the entire cost of certain property in the year of purchase. The new law allows a Section 179 deduction for up to $500,000 in 2010 and 2011 for qualified property. If the total purchase of all acquired property exceeds $2 million, there is a dollar-for-dollar decrease in the allowable deduction.
Qualified property includes tangible personal property (such as equipment and furniture) and software that must be used more than 50% in a trade or business. Prior to this new act, real property (buildings and structural components, air and heating units) did not qualify for this special treatment. Now the definition of qualifying property expands to include ‘qualified real property,’ and limits the Section 179 deduction on this type of property to $250,000.
Qualified real property includes the following:
• Qualified leasehold improvements
These are improvements to interior parts of non-residential real property placed in service more than three years after the date the building was first placed in service. This does not include improvements to the exterior, elevators or escalators, common areas, or internal structural framework.
• Qualified restaurant property
A building or improvement to a building if more than 50% of the building’s square footage is devoted to preparation of and seating for on-premises consumption of prepared meals.
• Qualified retail improvement property
Improvements to non-residential real property if such space is open to the general public and used in the retail business of selling to the general public that meets the other definition of qualified leasehold improvements.
The Section 179 deduction is allowed to the extent of taxable income, with the remainder carried forward to the next year. Be careful, however, because Section 179 carry-forwards on qualified real property are not allowed beyond 2011.
 Extension of ‘Bonus’ Depreciation
The bill also extends through 2010 the 50% first-year bonus depreciation that had expired. The allowance is 50% of the depreciable basis of qualified property for assets purchased and placed in service for 2010. To qualify, the property must be a new (not used) asset that has a depreciable tax life of 20 years or less, software, water-utility property, or qualified leasehold-improvement property.
Land improvements also qualify as eligible property and include items such as sidewalks, roads, fences, bridges, and landscaping. There are no purchase or income limitations as described in the Section 179 deduction, and many large businesses can benefit from taking this extended provision to offset taxable income.
 New Reporting Requirements
The law provides for $12 billion of tax relief and builds in some revenue raisers to help foot that bill. One revenue booster requires informational reporting (typically 1099-MISC) on rental-property expense payments of $600 or more for individuals who receive rental income. There are exceptions to reporting requirements, such as for individuals who can show that the requirements create a hardship, individuals who receive rental income of a minimal amount, for members of the military who rent their principal residences temporarily. Further guidance on these exceptions should come out by the end of the year.
 What This Means for Your Business
For many, 2010 may be a year when cash flow does not match taxable income, and businesses are striving to maintain their capital in the business instead of paying taxes. If qualified-asset purchases are less than $2 million, a Section 179 deduction can be taken to reduce taxable income.
 In addition, if there are new land improvements or qualified asset purchases over $2 million, taxable income can be offset by taking the bonus 50% depreciation. Businesses can also elect to exclude real property from qualified Section 179 property if the regular $2 million cap is close to being reached. Whichever method is used, there are several strategies that may be implemented to defer taxation. In deferring taxation, property owners have additional cash available to grow their business.
 SBJA and Section 179 Deduction (Adjustments)
A qualifying taxpayer can choose to treat the cost of certain property as an expense and deduct it in the year the property is placed in service instead of depreciating it over several years. This property is frequently referred to as section 179 property.
 The Small Business Jobs Act (SBJA) of 2010 increases the IRC section 179 limitations on expensing of depreciable business assets and expands the definition of qualified property to include certain real property for the 2010 and 2011 tax years. Under SBJA, qualifying businesses can now expense up to $500,000 of section 179 property for tax years beginning in 2010 and 2011.
 Without SBJA, the expensing limit for section 179 property would have been $250,000 for 2010 and $25,000 for 2011. The $500,000 amount provided under the new law is reduced, but not below zero, if the cost of all section 179 property placed in service by the taxpayer during the tax year exceeds $2,000,000.
 The definition of qualified section 179 property will include qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property for tax years beginning in 2010 and 2011.
 Increased Bonus Depreciation for 2011
The bonus depreciation amount for business assets purchased in 2011 has increased to 100%. This means you can fully depreciate the cost of any business asset purchased next year. The bonus depreciation amount for business assets purchased in 2010 is 50%.
 For additional information on how the tax cut extensions apply to your business consult a licensed CPA or attorney.

For addtional information on equipment lease financing contact the experts at Mazuma Capital 801.816.0800
 Source:
IRS.gov
http://www.irs.gov/formspubs/article/0,,id=177054,00.html
Smart Money, Tax Blogs

Major Incentives for Equipment Purchases in Year-End Tax Bill

Companies have something to cheer about when it comes to their upcoming large equipment purchases.  The new tax-law that went into effect this week includes 100% expensing for qualified capital investments, including investments in plants and equipment, for 2011 and a 50% deduction for 2012. This is great news as companies remain uncertain when it comes to the economic growth for business.
 
Mazuma Capital supports the ELFA in their crusades for the use of capital formation tax incentives.  The focus remains on the need to invest in plants and equipment as a key component of economic growth and competitiveness. The provision allowing the full deduction – without monetary limitations – of qualified capital investments through 2011 and the 50% bonus depreciation level for 2012 is a major win for economic growth.
 
We hope to see growth in manufacturing and in many industries whom have felt the pinch of the current economy.  Agriculture, construction, manufacturing and transportation outlooks seem positive as growth is reported.  We will all be routing for the best as we continue full steam ahead into 2011.

Bonus Depreciation Provisions Cleared in Tax Relief Package

Bonus Depreciation Provisions Cleared in Tax Relief Package
With just weeks to go before the end of the year, Congress cleared tax relief legislation extending the Bush-era individual and capital gains/dividend tax cuts for all taxpayers for two years.

The Tax Relief Act provides for an AMT "patch," a one-year payroll tax cut, 100% bonus depreciation through 2011 and 50% bonus depreciation for 2012 and a top federal estate tax rate of 35% with a $5 million exclusion, and more.