Baking & Snack - October 2015 - 22

FINANCING,LEASING

Tax benefits gained from leasing
Leases come in various structures, but
when determining tax breaks, bakers need
to decide if they're primarily entering a
capital or operating lease.
A capital lease occurs when the ownership of the asset transfers to the lessee or
baking company at the end of the term,
noted Matt Carlisle, corporate account
executive, United Leasing, Inc. For accounting and tax purposes, such a lease is
treated like a loan. Because equipment is
listed as an asset and the lease payments
as a liability, the bakery can claim depreciation and interest expenses.
An operating lease occurs when ownership of the equipment or building is
retained by the lessor or finance company
after the term of the lease. Payments are
considered an operating expense - not as
debt - which allows the baker to deduct
the full lease as a rental expense.
"There are current changes in the accounting rules for leases under consideration by the International Accounting
Standards Board and the US Financial
Accounting Standards Board. It's important to consult your CPA about the proper
accounting treatment and any potential tax
benefits," Mr. Carlisle said.

"If a road needs to be
improved or needs to
be widened, get it done
immediately."
Frank Spano, Austin Consulting
In addition to incentives, companies need to gauge
the temperature of the community's and state's regulatory climate. Mr. Spano recommended meeting with
local officials, as well as existing businesses, to get a
"good barometer" on how easy it is to get air, water and
building permits. Additionally, he suggested evaluating
the quality of industrial parks. "Are they up-to-date and
modern?" Mr. Spano asked. "Is the community looking
to expand in the future? Do they have the foresight for
expansion? Did they purchase 500 acres for a new industrial part for the next five years? That will help you

22 Baking & Snack October 2015 / www.bakingandsnack.com

determine if the community is looking ahead to grow."
After spending a day in the community, sometimes it
just clicks. "You say to yourself, 'These folks really get it.'
They're not just giving you lip service," Mr. Spano said.

Evaluating private financing
Often the determination to lease or buy comes down to
cash flow management and the ability to run a business,
according to Matt Carlisle, corporate account executive,
United Leasing, Inc., Evansville, IN. "If you have a big
contract, leasing can be an additional source of financing for equipment and vehicles needed to meet your customers' demands," he said. "If your business slows, leasing helps preserve your cash and bank lines. Having cash
on hand can help your company overcome the sudden
downturn in business."
In addition to preserving capital, a lease can be structured to stretch payments over time, or even reduce payments during those periods when business is slow. That's
especially critical for seasonal operations such as frozen
pie and dessert manufacturers that see revenue blossom near the end-of-the-year holiday season and slump
afterward.
Typically, leases run from 18 to 84 months - many
with an option to buy at the end of the term, Mr. Carlisle
explained. Down payments are generally less for leasing
- often just one month's payment versus 20% or more
for a conventional bank loan. "By not having a big payment upfront, it allows you to invest in other parts of
your business that are more profitable," he said.
Many leases come with a purchase option to buy the
equipment when the term expires. "By paying over term,
that new piece of equipment - whether it's a new oven
or a vehicle - is generating income for you," he said.
United Leasing works with companies like BakeRite
Systems, a Richmond, KY-based supplier of baking
equipment. The finance company, which buys the equipment, then leases it to the bakery, makes money on interest and other fees. For the equipment vendor, leasing can facilitate sales to baking and snack businesses.
"Unless [the vendor] provides a warranty or guarantee
on the equipment, there isn't any risk for them," Mr.
Carlisle explained. "Our obligation is between us and
their customer."
In today's economy, a company needs to know how
money talks - whether it's coming from public or private institutions. Reducing overhead and preserving
capital can allow companies to grow their businesses
in good times or save that cash for a rainy day. Or as
Mr. Carlisle noted, "The objective is being able to
weather the storm of a downturn and having the ability
to take advantage of new opportunities when they present themselves."

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Baking & Snack - October 2015

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