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Financial Tax Laws
 
Several changes in the tax laws clearly penalize purchasers of capital equipment, making renting and leasing more attractive than ever. Consider these significant tax consequences when your company anticipates acquiring new assets...
The Alternative Minimum Tax (AMT)
The AMT ensures that all profitable companies pay income tax. The law requires that a company compute its taxes twice -- once using the regular method which has a maximum 35% tax rate, and again using a 20% rate, but adding certain tax preference items to the income. Tax preference items include accelerated depreciation taken on capital assets.
Renting or leasing equipment, rather than buying it, avoids the AMT, as rental and lease payment deductions are treated the same under AMT calculations as under normal tax computations.
Mid-Quarter Convention (MQC)
If you purchase more than 40% of your assets for the year in the last fiscal quarter, the MQC requires that you depreciate all assets from the middle of the quarter in which they were purchased. This normally causes a lower first-year depreciation write-off. To avoid the write-off loss and the administrative tracking difficulties than can result, many companies opt to rent or lease such assets until the following year.
Foreign Tax Credits
For multinational companies, renting or leasing may result in greater utilization of foreign tax credits. The foreign tax credit limitation calculation requires that a certain portion of the taxpayer's interest expense be assigned to foreign source income. This reduces the otherwise available foreign tax credits. Rental expense, however, is not considered foreign source, unless the asset is located outside the U.S.
Note: This is for informational purposes only. Tax laws are subject to change. Please consult a tax advisor.

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