FF&E and Renovation Financing

With flexible repayment options of up to 84 months as well as deferred payment plans, you can properly size your monthly payments to your company’s cashflow and your other unique needs and circumstances. Additionally, when you finance your FF&E items, you preserve your established lines of credit so you still have 100% of your bank borrowing capabilities available for other needs as they arise. Typically, FF&E financing will not affect your personal credit, unlike loans or credit cards. Short finance terms and flexible buyout options are also available.

Companies should structure their financing to take advantage of tax incentives included in Section 179 and Section 168 of the Internal Revenue Code as well as properly choose between an operating lease and a capital lease. Be sure to speak with your tax advisor so you can select which options work best for your company’s specific tax situation.

What is Internal Revenue Code Section 179 and Section 168?

Financing equipment, furnishings, or software using an Equipment Finance Agreement (EFA), or a $1 Buyout agreement makes business owners potentially eligible for not one, but two tax deductions. The Section 179 depreciation deduction and the Bonus Depreciation deduction provide business owners with ways to reduce their taxes while acquiring income earning assets. Those tax deductions, coupled with a consistent monthly payment, may allow them to lower the overall cost and improve their return on investment.

Section 179 enables businesses to depreciate the entire price of their equipment purchase – up to $1.08 million during the current tax year, provided the equipment is placed in service before the end of their tax year. Typically, businesses would take 4-6 years to depreciate equipment. Small businesses looking to purchase or refresh their equipment may benefit greatly from this deduction – especially if they are looking for tax relief.

Bonus Depreciation (Section 168) is just what it sounds like: a bonus tax break for your business. The deduction has no dollar limit and currently allows users to deduct 100% of their qualified taxable assets within the first year of purchase if the qualified equipment is used in at least 50% of business operations. The 100% Bonus Depreciation rate won’t be around for long – the deduction begins to phase out in 2023 at a rate of 20% per year until 2027 (or, at least, until Congress changes the law). Both deductions can be used individually or combined. If combined for the same asset, the Section 179 deduction must be taken first, followed by the Bonus Depreciation.

What is the difference between an Operating Lease and a Capital Lease?

Operating Lease (True Lease)

An operating lease, also known as a true lease, is a contract between the owner of an asset, known as the lessor, and the holder of the lease, known as the lessee, that grants the lessee the rights to use that asset for a specific period of time, without transferring the ownership rights of the asset to the lessee.

The payments you make towards the lease are accounted for as operating expenses and recorded on the income statement rather than on the balance sheet, thus making operating leases a type of off-balance-sheet financing.

Operating leases are considered to be a type of rental agreement, due to the lack of transfer of ownership, the expensed lease payments, and, in some situations, the short-term length of the lease.

You will record the payments as rental expenses on your income statement and benefit from any corresponding tax deductions related to renting an instrument (similar to renting office space). Operating leases are also not recorded as debt, which means they can be significantly less cumbersome when it comes to contract terms.

Capital Lease

A capital lease is defined as a contract between a lessor and lessee that, like an operating lease, grant the lessee the rights to use an asset. However, unlike an operating lease, a capital lease also involves:

1. Treating the leased asset as if it were purchased for accounting purposes.
2. The transfer of ownership of the asset from the lessor to the lessee at the end of the lease term.

Because of this, capital leases are considered a purchase of an asset, and are accounted for on the balance sheet. 

Furthermore, because it is considered a purchase, a capital lease is seen as more of a loan than a rental, and this has a slightly different impact on a company’s financial statements, influencing its assets, liabilities, depreciation expense, and interest expense.

For example, with a capital lease, in the eyes of the IRS, you are taking out a loan for your kitchen equipment.  So instead of recording rental expenses on your income statement, you will record a debt on your balance sheet along with the corresponding principal payments.  Capital leases also come with the burdensome terms of a bank loan, since they are identical debt instruments.  Capital leases, like debt, accrue interest.  When tax season comes around, under current IRS rules, you can deduct the interest expense, but these deductions are typically lower than the rental expenses of an operating lease.

Typical Finance and Lease Products offered by FF&E financing companies.

Finance Agreements

Similar to a loan, equipment, furnishings, and or software is sold to the end user as dollars are borrowed to pay for the equipment. The end user owns the equipment from day one and the funding source has secured interest in the equipment. This is great for business owner customers wishing to preserve their cash flow and want to own their own equipment.  Unlike standard loans, a Finance Agreement is simple and reduces the time it takes to process the transaction and can include additional charges within the monthly payment. 

$1 Buy Out

The $1 Buy Out purchase option allows the business owner lessee to own the equipment written on the lease upon fulfillment of the lease’s contractual obligation for $1.00 with no renewal lock. Title transfer will be given to the lessee after the final payment is made – because the lessee owns the equipment at end of term, no return freight costs are issued. This lease type also provides potential capital lease tax advantages for lessees.

Rental Lease

A rental lease (operating lease) provides lessees with the ability to have a current and quality solution for a fixed monthly payment over a desired duration without the option to purchase the equipment or furnishings at the end of the term. The lessee has a few choices ranging from returning the equipment or continuing to rent the equipment after their specified lease duration is up.

Fair Market Value

A Fair Market Value lease is the best option for lessees looking to regularly refresh technology. The low monthly payment, potential operating expense deduction, and multiple end of term options resulting in ownership make this ideal for lessees interested in upgrading at the speed of technology. They can choose between four different options at end-of-term, including upgrade, buyout, renewal, and return.

Fixed Purchase Option

This lease includes a defined end-of-term purchase option with built-in flexibility for lessees. They can choose between four different options at end-of-term, including upgrade, buyout, renewal, and return. With a slightly higher monthly payment than other leases that offer purchase options, the fixed purchase options helps lessees reduce their anxiety around their total cost of ownership.

Spirides Hotel Finance Company assists hotel owners and developers to fully understand the differences between all of these numerous FF&E and renovation financing options.