There’s a significant connection between leasing equipment and bonding capacity, so it’s important to know all the factors that might stand between you and larger projects.
Bonding companies use a simple formula to determine contractor capacity. They multiply your liquid assets by 10, then take 75 percent of the result. If the new figure is lower than the amount of the job you’re bidding on, you won’t qualify for a bond. If the new figure is higher, you’ll be in the running.
Let’s look at an example of how leasing has a positive effect on the bonding companies’ formula.
Bonding with an Installment Loan
A contractor with $400,000 in liquid assets wants to bid on a $2.8-million project. Before the bidding process, he purchases a $250,000 piece of equipment on an installment loan, and the down payment reduces his liquid assets by $37,500.
The bonding company would then plug the numbers into the formula:
Liquid assets ($362,500) x 10 = $3,625,000 x .75 = $2,718,750
The new total of $2.7 million is lower than the amount of the bid. This contractor might not be able to get bonded and might be unable to compete for the project.
Bonding with a Lease
Had the contractor leased the equipment, the results would have been different. Leased equipment, with the proper structure, doesn’t appear as a balance sheet asset, so his liquid assets would have only been reduced by the amount of his first two lease payments, roughly $10,000.
When you plug $390,000 into the formula, the contractor qualifies for a bond:
Liquid assets ($390,000) x 10 = $3,900,000 x .75 = $2,925,000
While installment loans let you depreciate the equipment and apply that deduction on your tax return, leasing enables you to deduct expenses. Both options reduce your tax liability, but leasing often creates a greater deduction. When you buy the equipment at lease termination, you can start the depreciation cycle, stretching your tax benefit out even longer. If reducing your tax liability is a high priority, you should always get firsthand advice from a certified public accountant.
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