Bill Bosco,
President,
Leasing 101

I have written a series of articles for the Monitor called “CFO Chats,” which are slices of life sales calls in a leasing salesperson’s life. I have heard others’ concerns that artificial intelligence is “going to replace us all,” so I tested ChatGPT against my first article in this series to see if I have to start working on a career change.

To properly compare, it will be helpful to first reference “Crunching the Numbers: Introducing CFO Chats.”

ChatGPT’s Version of CFO Chats

I am a CFO of a publicly traded C corporation. My tax manager says we have been so profitable that we used up our NOL (net operating loss) and we will pay federal income taxes this year. We need to add $20 million in IT equipment and I was thinking of drawing on my bank lines to buy the assets. We should take advantage of Bonus MACRS as we can use the tax benefits of ownership of depreciable assets. I also want to improve our EPS and ROA. Should I borrow to buy or should I lease? If I lease what type of lease would you recommend?

Deciding whether to borrow or lease IT equipment involves several factors, including your company’s financial situation, tax considerations, EPS (earnings per share) and ROA (return on assets) goals. Let’s break down the considerations for each option:

Borrowing to Buy:

1. Tax Benefits: Purchasing the equipment through borrowing allows you to take advantage of Bonus MACRS (modified accelerated cost recovery system) depreciation, which can provide significant tax benefits. Bonus MACRS allows you to deduct a larger portion of the equipment’s cost in the early years of ownership, reducing your taxable income.
2. Ownership: Buying the equipment gives your company full ownership and control over the assets. This can be advantageous if you anticipate a long-term need for the equipment and want to retain flexibility in its use.
3. EPS and ROA: While borrowing increases your debt, the increased asset base can potentially improve your return on assets (ROA) if the equipment generates additional revenue or efficiencies. However, it may not directly impact EPS unless the increased profitability translates into higher earnings available to shareholders.

Leasing:

1. Cash Flow: Leasing typically requires lower upfront cash outlay compared to borrowing to buy. This can be beneficial if you prefer to preserve cash or maintain liquidity for other purposes.
2. Tax Considerations: Depending on the type of lease (capital or operating), you may still be able to claim tax deductions for lease payments. However, you won’t benefit from Bonus MACRS depreciation since you don’t own the assets.
3. Flexibility: Leasing provides flexibility to upgrade equipment at the end of the lease term without the burden of ownership. It also protects against technological obsolescence.

Recommendation: Given your goal to utilize tax benefits and improve EPS and ROA, buying the equipment through borrowing seems more aligned with your objectives. However, consider consulting with your tax advisor and financial team to analyze the specific financial implications and risks associated with borrowing, including interest costs, debt covenants and the impact on your balance sheet and cash flow. If you proceed with borrowing, ensure that the investment in IT equipment will indeed contribute to increased revenue, cost savings or efficiency gains to maximize the return on your investment and justify the additional debt.

What a Relief!

Whew! Thank goodness the AI/ChatGPT world has not caught up with me. It does not know lease products, corporate finance or accounting treatments of alternative financial products.  Some of the advice on EPS and ROA improving if you borrow to buy is flat out wrong!

Granted, I am wary, as I heard the more you work with ChatGPT and AI, the more it learns and understands. My strategy is to stop playing with it but keep on meeting real people (customers), probing, listening and creating the best lease structure presented in a hard-hitting way that meets their needs.

ABOUT THE AUTHOR: Bill Bosco is the president of Leasing 101, a lease consulting company. Bosco has nearly 50 years’ experience in the leasing industry. His areas of expertise are accounting, tax, financial analysis, structuring, pricing and training. He was on the ELFA accounting committee from 1988 to 2017 and was chairman for 10 years. He is a frequent author and speaker on leasing topics. He was honored at Monitor’s 50th anniversary celebration as the MVP Behind the Scenes for his industry advocacy and writings. He has received a distinguished service award from the ELFA and was inducted into the ELFA Hall of Fame. He can be reached at [email protected].