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Lease financing, the different types of leases, tax effects, evaluation by the lessee and evaluation by the lessor and other rea - Research Paper Example

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Lease financing, the different types of leases, tax effects, evaluation by the lessee and evaluation by the lessor and other rea

Research objectives The research paper will try to analyze the different types of leasing and the effects of the leasing on the lessor and lessee. Literature Review In order to obtain business equipment and supplies that can shed its effects on the flow of money, one can rely upon lease financing as the possible way to straight up capital. Recent surveys prompt that more than 80% of the business organizations in the United States rely on this alternative at minimum one of the equipment acquisitions. It is forecasted that almost 95% would lease in the future. Lease financing is often referred to as “lease”. (Lee, 2003, p. 8). It is a contractual agreement involving two parties the lessor and lessee. The lease can be defined as a legal document that must be reviewed by an experienced attorney. The company acts as the lessor grants the individual or group acting as the lessee leasing the product or equipment. The contract assigns the lessee to operate the equipment for some pre specified time. In the period the lessee is required to make monthly payments to the lessor for providing the opportunity. Lease can be categorized into the following: lease of finance and lease of operation, sale and lease back along with direct lease, lease of single investor and leveraged lease, domestic lease and international lease (FLA, n.d.). However finance lease and operating lease are the most popular leases. A financial lease covers the entire life of the equipment to be leased. A sale and lease can be thought of as one type of financial lease. One can even think of combination lease. This type of lease combines aspects of the popular leases (Auburn University, n.d. p. 1). The effects of the tax can be categorized in the following two ways. The first category is to determine the effects of each flow of cash on taxable income. Rents or other type of fees tend to increase the taxable income while expenditure has the opposite effect. The second category is to compute the amount of the tax to be paid and time when the payment is to be made. After the calculation of the taxable income the rate of the tax is applied to arrive at the liability. The tax is generally paid with 4 installments. The fourth, sixth, ninth and the twelfth month is regarded as the months of payment for the particular year. The amount of the flows is referred as magnitude. One needs to determine the timing of the flows. It is easy to calculate the cash flows before tax but it may not so easy to calculate the cash flows caused by taxes. At this moment it is just not sufficient to find out the payment to the IRS. The timing of the payment and credits are to be taken into consideration. An entity that is leased will want to find out the value of inflows and outflows. The business activity of all business shapes will be encompassed on the payments made to the IRS. The flow of cash before tax is exposed to credit and default risks. The flow of cash due to tax is exposed to modifications in the laws of tax. In true leases the provisions of a certain company allow 200% of the residual basis of an asset. This is written off over the depreciable life of an asset under consideration. Suppose the cost of equipment is 1,000,000 dollars. The term of the contract is 10 years. There are 40 quarterly payments in arrears amounting to 30,392.32 dollars. The life of the chosen company is 7 years and the rate of tax is 35%. The residual allowed is 20%. Some proportion of the benefits from ...Show more

Summary

Lease financing, the different types of leases, tax effects, evaluation by the lessee and evaluation by the lessor and other reasons for leasing. Contents Introduction 3 Research objectives 3 Literature Review 3 Conclusion 9 Reference 10 Introduction Flexibility makes leasing an attractive and effective form of financing…
Author : palma61
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