Lease versus Buy Analyses: Clarifying the Impact of Tax and Borrowing Rates

20 Pages Posted: 16 Oct 2018 Last revised: 23 May 2019

See all articles by Jim Musumeci

Jim Musumeci

Bentley University - Department of Finance

Thomas J. O'Brien

University of Connecticut - Department of Finance

Date Written: May 21, 2019

Abstract

Most managerial finance textbooks promote the “conventional wisdom” that leasing’s main motivation is a shift in tax deductions from a lower tax rate lessee to a higher tax rate lessor, creating a benefit that is shareable via a negotiated lease payment amount. This critique clarifies two aspects of this issue for instructors and analysts. First, as a lone text shows, leasing may create an overall tax benefit even if the lessee has a higher tax rate than the lessor. Second, a difference in lessee and lessor borrowing rates may be a more important source of a lease’s overall benefit than a difference in the tax rates.

Keywords: leasing, taxes, borrowing rates

JEL Classification: G32

Suggested Citation

Musumeci, Jim and O'Brien, Thomas J., Lease versus Buy Analyses: Clarifying the Impact of Tax and Borrowing Rates (May 21, 2019). Managerial Finance (2019), Vol 45, No. 5, 686-696; University of Connecticut School of Business Research Paper No. 18-26 . Available at SSRN: https://ssrn.com/abstract=3253965 or http://dx.doi.org/10.2139/ssrn.3253965

Jim Musumeci

Bentley University - Department of Finance ( email )

175 Forest Street
Waltham, MA 02154
United States

Thomas J. O'Brien (Contact Author)

University of Connecticut - Department of Finance ( email )

School of Business
2100 Hillside Road
Storrs, CT 06269
United States
860-486-3041 (Phone)
860-486-0634 (Fax)

HOME PAGE: http://www.business.uconn.edu/staff.asp?id=57

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