Lease versus Buy Analyses: Clarifying the Impact of Tax and Borrowing Rates
20 Pages Posted: 16 Oct 2018 Last revised: 23 May 2019
Date Written: May 21, 2019
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: Suggested Citation