Leasing Profits

A complex tax law change

When it comes to the leasing business, most people automatically think of companies like Hertz, Avis or Ryder System. In fact, much of the $30 billion-a-year leasing industry involves the back-and-forth renting between companies of everything from printing presses to jet planes. Certain provisions in the Reagan tax package now promise to shake up, and open up, the entire business.

Treasury officials say the changes are needed to boost business investment; critics complain that the provisions amount to little more than a multibillion-dollar federal giveaway.

Supporters of the measure contend that the changes will actually stimulate investment in new plant and equipment by companies that otherwise might not be able to take advantage of the new act's liberalized depreciation and investment tax credit provisions. For example, the investment tax credit lets a company reduce its yearly income taxes by either 6% or 10% of that year's capital investment. Unfortunately, such provisions are helpful only to those companies that are already profitable and actually paying taxes. Since low-profit and no-profit firms cannot make use of the benefits, they can find themselves at a disadvantage among healthy firms, which can.

To create what one Treasury official describes as a "level playing field" for business, the new provisions now let struggling companies sell their tax credits and depreciation opportunities to more profitable firms.

Take the hypothetical case of cash-starved Meager Motors, which is anxious to improve productivity at its auto assembly plant by buying $10 million worth of industrial robots. For help, M.M. turns to lucrative Moneytronics Corp. Once Meager Motors buys its robots, the high-tech firm agrees to step in and take them off the automaker's hands for a $2 million down payment, with the remaining $8 million to be paid out over five years.

Immediately upon buying the robots, Moneytronics turns around and leases them back to Meager Motors under a five-year deal in which the rental payments from the automaker exactly match, and cancel out, the loan payments by the high-tech firm. At the end of the lease, Meager Motors buys back the machines for $1. Result: Moneytronics not only receives a $1 million investment tax credit that offsets 50% of its down payment on the equipment, but the firm also gets to claim depreciation tax benefits. Thus it can effectively postpone paying taxes as well as enjoy interest-free use of substantial amounts of money over part of the lease. That makes the deal worthwhile. Meanwhile, M.M. benefits by getting $2 million in cash from Moneytronics, which amounts in effect to a 20% discount on the price of the equipment.

The losers are the nation's taxpayers.

By fiscal 1986 the cumulative federal largesse could swell to $29 billion, making it one of the biggest business subsidies in the tax bill.

A growing list of companies in ailing industries like steel and autos have been hungrily eyeing the new regulations. But companies with poor credit ratings may not find the leasing razzmatazz so easy to arrange. Wary that the regulations could wind up leading to a wholesale corporate raid on the Treasury, officials in the department last week issued temporary rules that could sharply restrict, if not actually prevent, a number of firms with low credit ratings from taking advantage of the leasing opportunities. That could prove bad news for companies like Chrysler, Ford and International Harvester, which have all been looking forward to raising cash by selling off investment tax credits. More financially sound companies should experience no such problems.

If all the paper shuffling does eventually result in boosts in business investment, the program will clearly have been worth the trouble. On the other hand, for many of the accountants and lawyers who expected to suffer under the new President's deregulation drive, the provisions are nothing less than a new lease on life. -

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