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The Green Sheet Online Edition

January 24, 2011 • Issue 11:01:02

Street SmartsSM

Will leasing make a comeback? - Part 2

By Ken Musante
Eureka Payments LLC

Editor's Note: This is the second article in a two-part series on leasing. The first installment was published in The Green Sheet, Jan. 10, 2011, issue 11:01:01.

Let's begin with an excerpt from a section on IRS.gov titled SBJA and Section 179 Deduction. It appears to support GS Online MLS Forum member JPFEYCHE's opinion (stated in Part 1 of this series) that a lessee under a capital/finance lease can write off the entire lease amount (up to $500,000 for 2010) in one year instead of depreciating its cost over time:

"A qualifying taxpayer can choose to treat the cost of certain property as an expense and deduct it in the year the property is placed in service instead of depreciating it over several years. This property is frequently referred to as section 179 property.

"The Small Business Jobs Act (SBJA) of 2010 increases the IRC section 179 limitations on expensing of depreciable business assets and expands the definition of qualified property to include certain real property for the 2010 and 2011 tax years.

"Under SBJA, qualifying businesses can now expense up to $500,000 of section 179 property for tax years beginning in 2010 and 2011."

MARINESTABAN suggested also taking into consideration "the lost opportunity factor whereas the merchant can use the money they pay upfront to invest in other aspects of his business. Also, including other products with the terminal such as gift cards ... will increase the value of it. Most of my merchants that are CPAs go for the lease option.

"Last, most of the leases I do involve multiple terminals and more complex setup; therefore the tickets get pricey. There is a place for leasing; you just need to find it."

GMARTIN interjected this view: "Payment consultant: what's best for the merchant while earning a fair profit. Pure salesman: whatever earns the most profit regardless of what is best for the merchant. One model usually gains trust and long-term revenue, while the other gains instant gratification but risks the long-term revenue a merchant can provide."

BER provided a comparison of leasing versus buying. We know merchants may opt for different tax treatments, but at least we can see how MLSs might pitch leases to merchants. BER wrote, "As the market moves more toward POS and integrated solutions, I think leasing will grow stronger." He then offered illustrative examples, as well as commentary, which are included in the sidebar accompanying this article.

BER is not a tax professional and did not claim to be offering tax advice. "I talked to my CPA, two of his CPA buds and a corporate accountant friend of mine," he said. "All four let me know it is vague as to the specifics as if credit card terminals meet the 179 eligibility requirements and as to whether the terminal would be eligible.

Why lease?

This information on buying versus leasing terminals was posted by forum member BER in the "Street Smarts Article - Will Leasing Make a Comeback?" thread on GS Online's MLS Forum.

Example 1: Merchant buys terminal for $350

  • Merchant now has $350 less cash for business expenses, inventory, labor, expansion.
  • Let's assume the useful life of the terminal is 5 years.
  • At a salvage value of zero (meaning the terminal is useless at the end of 5 years and carries no value) the merchant can write off $70/year ($350/5 years, using straight line depreciation).
  • At a salvage value of $50, the merchant can write off $60/year for 5 years ($350-$50/5years).
  • If the merchant waits 5 years to replace terminal, they can take full advantage of the depreciation.
  • If merchant replaces before 5 years, merchant does not take full advantage of depreciation.

Example 2: Merchant leases terminal for $13/mo for 36 months

(I came to $13/mo by assuming that the terminal in the above example has a cost of $250 and a profit of $100, then figuring a funding rate of 75 percent of total payments. So working backwards ... $350/.75 = $466.66 for the total payment to get $100 in profit; then divide the total payments by 36 months, the term of lease; $466.66/36 = $12.96, rounded to $13.)

  • Merchant can write off the total of the lease payments each year, or $156/year each year for all three years ($13 x 12 mos).
  • Each year, the merchant writes off their exact cost of the lease that year, what they actually spent, no waiting for the depreciation to equal their initial expense on the terminal.

So why would a merchant lease?

  • One of my business professors always said, 'If you can use someone else's money, do it' ... in regards to the cost of your own capital. The same applies here in the lease situation. Like I stated before, if a merchant spends an initial investment of $350, he will have less money for business expenses, expansion, materials and labor.
  • The math works out the same, after tax deductions, for a lease versus an outright purchase:
      + $350 written off in 5 years, if you assume $0 salvage ($70/yr)
      + $468 written off in 3 years if leasing ($156/yr)
  • The benefit here is that a merchant can get a new terminal every three years with the same after tax cost.
  • Also, some leases cover if the terminal gets broken, defective, etc. That is a direct advantage of purchasing.
  • When a merchant spends on a lease, they write off the same amount they spent that year, as opposed to depreciating the terminal over 5 years in the situation of a purchase, where a merchant would spend $350 the first year and write of $70.

"Also depreciation can be done on a terminal using straight line or MACRS [the modified accelerated cost recovery system]. All four confirmed that it is definite that all lease payments for terminals can be written off each year, effectively zeroing out versus a depreciated piece of equipment/cc term. All four said they'd urge their clients to lease just to make sure to be able to get a full deduction. As well, all understood and agreed that leasing was a better option, if not just for deductions but for getting new equipment sooner."

BER went on to state, "So what about when a merchant leases a terminal for more than what it's worth? Guess what? They can still write off the total of the lease payment and in the end have the same result. So let's say the same merchant leases that same terminal for $19/mo now ... or even $29/mo. While they may have less money per month as a result of the higher lease payment, at the end of the year, the math will equal out ... $13/mo or $29/mo as they can write either off completely. Now, who can explain this to a merchant, build the value and consummate the sale with a $15 x 36 lease? ... That's a different story."

BER believes that even competing against the free terminal flyers, postcards and cold calls, leasing is not dead. "We can all agree that getting a merchant with FTP (free terminal program) to switch to a lease is not a likely or easy switch," he said. "But to build value and sell a lease to a brand new merchant [is] not as difficult, especially if you have a referral relationship pushing you the leads.

"I have commercial real estate referral relationships sending me new merchants, relocating merchants and expanding merchants. In order to make it worth it on a new merchant, I lease terminals whenever I can and utilize a program from one of my ISOs with a bigger split and no upfront. Of course this doesn't always work, but I always explain the option to the merchant first. If they would rather purchase, I don't fight it.

"Now if they want FTP, I explain the program as not ever really being free, just moving around of fees charged to make up for the cost of the terminal. At the point they decide on FTP, I decide whether or not a new merchant is worth it, or if they fit what I am looking for in a merchant for my portfolio.

"I can say that I quite frequently walk from FTP for new merchants. I am no longer looking to just add any old merchant; I look at it more like adding an investment to my portfolio ... but instead of deciding if to invest my money like in the stock market, I decide whether to invest my time."

Obviously divergent views on leasing exist, and, as MTY MSI reminded us, "profit" is not a dirty word. "So it is agreed that profit is not allowed under the 'Jo Momma' rule (yet to be enacted)," MTY MSI posted. "An ISO/MLS should not consider equipment lease as a profit center. We should instead be merchant advocates profiting on reduced margins. Last time I checked the literal IRS distinction between a 'for profit' and a 'nonprofit' entity was profit, aka taxable profit.

"Simple math reveals, for a small volume merchant, you've profited exponentially from an equipment lease. Are you ripping the merchant off? Depends - not if you're assisting with PCI DSS compliance and replacing equipment as necessary. All depends on merchant volume; you price accordingly."

Since it was a post by MAKETELINC that gave me the idea to discuss leasing here, I thought it appropriate to end with his perspective. He said it was actual experience that spurred him to speak out. "One of my accounts got taken by another guy, who somehow got the merchant supermarket rates on a [farmers] market," he wrote. "He had a greater markup than I did and a bunch of hidden fees, but hung around a few days pretending to go through all the statements and claiming to be saving the merchant a few hundred dollars a month (we all know that never happened).

"After spending a couple of days (not the busy days) in the store, he became a friend, and they couldn't say no. He then explained to them (not the truth) that he was giving them such a good deal where he got nothing for himself (as if). 'I have better equipment than yours - VeriFone 570s at $59.99 a month (four years); after all, you are saving a lot more than that on the processing, so let me make money somewhere,' [he said]. The lease was signed, the terminals installed. ... The agent has never been seen since.

"I learned two lessons: one always add an early termination fee ... the other lesson was that you could offer the merchant a better rate on condition that they ... lease, and explain to them that you get better money from the lease ... the rates will be low enough that almost no one could beat them. You get upfront money, and a locked-in lease psychologically binds the merchant...I have acted on my first lesson, but not the second. That was why I posted the original post, to see if anyone would feel that way."

To view the latest comments on this topic, visit the "Street Smarts Article - Will Leasing Make a Comeback?" thread on GS Online's MLS Forum. Thanks to all contributors.

And remember, when in doubt, sell something. end of article

Ken Musante is President of Eureka Payments LLC. Contact him by phone at 707-476-0573 or by email at kenm@eurekapayments.com. For more information, visit www.eurekapayments.com.

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