The construction industry is characterized by intense cash flow challenges. Generally,
construction companies don\u2019t get paid until a project or job phase is completed \u2014 and
subcontractors may have to wait even longer.<\/p>\n\n\n\n
As a result, there may be times when you need a quick cash infusion and don\u2019t want to deal with
the lengthy approval process of a business loan. One possible solution is sale-leaseback financing
involving one or more pieces of your construction equipment.<\/p>\n\n\n\n
Under a sale-leaseback financing agreement, your construction company sells an asset and then
leases it back from the buyer. Selling the asset can give you up to 100% of its cash value.
Moreover, you make no immediate sacrifice. You still get to use the equipment, and the added
cash flow from the sale may help you pay down debt, buy supplies, upgrade remaining assets or
simply improve liquidity.<\/p>\n\n\n\n
Besides obtaining a quick influx of cash, contractors have other reasons to choose sale-leaseback
financing over retaining ownership, signing a standard lease or taking out a loan. For example,
sale-leasebacks are typically less restrictive than other types of financing. And one of these
arrangements can be structured as a taxable sale under IRS rules, potentially allowing you to
offset the sale gain with other deductions to help reduce future tax obligations.<\/p>\n\n\n\n
Regarding revenue recognition, if the arrangement qualifies as financing and not an outright sale,
income is recognized over the lease term. This can help you manage taxable income.<\/p>\n\n\n\n
Additionally, lease payments made on the sold equipment may be tax-deductible, provided the
lease is treated as an operating lease under IRS guidelines. These include the stipulation that the
buyer transfers to the seller only the right to use the property without transferring ownership
rights.<\/p>\n\n\n\n
One major disadvantage of sale-leaseback financing is the loss of flexibility associated with
ownership, including your freedom to modify the asset. Also, typically, you won\u2019t resume
ownership at the end of the lease term unless the sale-leaseback agreement includes a repurchase
option.<\/p>\n\n\n\n
However, including a repurchase option may create accounting complexities. That\u2019s because,
under U.S. Generally Accepted Accounting Principles (GAAP), the arrangement will qualify as a
finance lease rather than an operating lease if any of the following apply:<\/p>\n\n\n\n
If a leaseback is indeed classified as a finance lease, it must be treated as if no sale has occurred
and accounted for as a failed sale-leaseback. Without a repurchase option, your sale-leaseback
will likely be classified as an operating lease, with interest and amortization combined as a
single, straight-line expense over the lease term.<\/p>\n\n\n\n
In summary, a lease\u2019s characterization affects the timing and presentation of expense recognition.
This may, in turn, affect certain financial ratios and operating metrics \u2014 such as earnings before
interest, taxes, depreciation and amortization (commonly referred to as EBITDA) \u2014 that
sureties, lenders and investors monitor.<\/p>\n\n\n\n
Important:<\/strong> A lease\u2019s tax characterization may not necessarily follow its GAAP characterization. Your construction equipment may have value that you can convert to cash using one or more \u00a9 2025<\/em><\/p>\n","protected":false},"excerpt":{"rendered":" The construction industry is characterized by intense cash flow challenges. Generally,construction companies don\u2019t get paid until a project or job phase is completed \u2014 andsubcontractors may have to wait even longer. As a result, there may be times when you need a…<\/p>\n","protected":false},"author":1,"featured_media":4256,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":true,"footnotes":""},"categories":[178,179],"tags":[180,181],"class_list":["post-4254","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-construction-law","category-sale-leaseback-financing","tag-construction-law","tag-sale-lease-back-financing"],"acf":[],"_links":{"self":[{"href":"https:\/\/www.apslaw.com\/construction-industry-advisor\/wp-json\/wp\/v2\/posts\/4254","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.apslaw.com\/construction-industry-advisor\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.apslaw.com\/construction-industry-advisor\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.apslaw.com\/construction-industry-advisor\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.apslaw.com\/construction-industry-advisor\/wp-json\/wp\/v2\/comments?post=4254"}],"version-history":[{"count":0,"href":"https:\/\/www.apslaw.com\/construction-industry-advisor\/wp-json\/wp\/v2\/posts\/4254\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.apslaw.com\/construction-industry-advisor\/wp-json\/wp\/v2\/media\/4256"}],"wp:attachment":[{"href":"https:\/\/www.apslaw.com\/construction-industry-advisor\/wp-json\/wp\/v2\/media?parent=4254"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.apslaw.com\/construction-industry-advisor\/wp-json\/wp\/v2\/categories?post=4254"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.apslaw.com\/construction-industry-advisor\/wp-json\/wp\/v2\/tags?post=4254"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}
The differing treatments tend to complicate tax and financial reporting.<\/p>\n\n\n\nOptimize asset management<\/h2>\n\n\n\n
sale-leaseback arrangements. However, you should do so only under the right circumstances and
with full knowledge of the potential drawbacks. Contact your CPA for assistance in
understanding the tax and accounting implications.<\/p>\n\n\n\n