Should Profitable Companies Lease?

We are often asked "Why would you ever use more expensive lease financing instead of cheaper bank money?"

Consider a $20,000 asset - the principals would extend up or down to larger or smaller amounts.

Ajax Leasing could do a $20,000 lease with:

  • 1 First Rental Payment of $10,000
  • followed by 23 Rentals of $493.73
  • with a $1000 Purchase Option at 24 months

The total cost of this lease is:

First Payment$10,000.00
23 Rental Payments @$493.73
Purchase Option$1,000.00
Total$22,355.79 less $20,000 = $2,355.79 or
$1,177.90 per year.

For the cost of $1,177.90 per year you get $15,431.03 of income tax shelter first year and $5,924.76 of shelter in the second year. Leasing depreciates the asset 90 percent in 2 years.

How much taxes are paid on $15,431 and $5,925 of income? That's why profitable companies lease!