Why Buy?

`Z' is for zero, to buy or not to buy, nix failure, How low can you go?
Magazine Contributor
8 min read

This story appears in the September 1999 issue of . Subscribe »

Y2K model cars speed into showrooms this month, sparking a burning question: Should you buy or lease your business car? may be the more affordable avenue, but it leaves you with nothing at lease-end. Tax implications may help you determine which alternative is best.

If you buy a car and use it for business purposes, you may recover part of its cost through annual . The amount, however, depends on the method of depreciation used, the cost of the car, the year it's placed in service and the percentage of total mileage that's for business. For cars used more than half the time for business, an alternative to the common deduction (the Modified Accelerated Cost Recovery System, or MACRS) is the expensing deduction (Section 179 of the Internal Revenue Code), which replaces depreciation the , according to the American Institute of Certified Public Accountants (AICPA). Any part of the cost not recovered through first-year expensing can be recovered through depreciation deductions in subsequent years, the AICPA notes.

Both methods cap first-year new car deductions at $3,160--less if the vehicle is used outside the business. For example, if you use your car 60 percent of the time for business, your maximum deduction is 60 percent of $3,160, or $1,896.

Leasing, on the other hand, allows you to deduct a portion of your lease payment plus other operating costs attributable to business. That is, if the car is used for business 90 percent of the time, you may write off 90 percent of your . However, the AICPA points out, you may be subject to an "inclusion amount" each year. This inclusion amount, which is added to your other income, applies if the car is leased more than and costs more than $15,800.

In the final analysis, it's important to run the numbers to determine whether buying or leasing is best for your situation--taking into account both tax and nontax considerations. Whatever you do, don't let the lure of snazzy new wheels dim your judgment. If you think you need help making your decision, consider talking to an accountant or other tax professional--their expertise and objectivity will surely steer you in the right direction.

Paul De Ceglie (MrWritePDC@aol.com) is a former staff reporter for Journal of Commerce and American Banker.

Farewell, Failure

If you have problems balancing your household checkbook or managing your personal finances, you'll more than likely need professional help when it comes to managing your business's finances. When start-up entrepreneurs fail to grasp the fundamentals of money management, "They discover that business survival requires more than simple record-keeping," counsels Paul E. Adams, professor emeritus of business administration at Ramapo College in Mahwah, New Jersey.

In Fail-Proof Your Business: Beat the Odds and Be Successful (Adams-Hall Publishing, $15.95, 800-888-4452), Adams describes the "perils, pitfalls and problems" of start-ups. The easy-to-read book, which focuses on avoiding the common mistakes made by most new business owners, also discusses the telltale warning signs of failure, how to deal with them and how to prevent potentially fatal problems.

Stressing that "money is the most important asset a start-up business has," the veteran educator and entrepreneur devotes three of the 10 chapters to "mastering money." Adams offers basic financial tips--how to devise a simple cash analysis report, prepare a budget, put together a one-page financial statement and more--and touches on such topics as accounts receivable, profit margins, budgeting, cash management and collections.

The anecdote-ridden Fail-Proof Your Business may be a bit elementary for some, but the 304-page book can't be faulted for being ambiguous. Adams, himself once on the brink of business failure, clearly and pointedly addresses the risks that concern all entrepreneurs, reveals the countless threats most have never considered, and shares some cogent counsel. This one is certainly worth a read.

Ground Zero

Are you a goal-oriented investor? Will you need $20,000 in five years to put a down payment on a house? $50,000 in 15 years for your child's education? $100,000 in 30 years for retirement? Zero-coupon bonds might be the perfect to help you reach those or other financial goals.

Issued by the U.S. Treasury, state and local governments, and corporations, zeros allow you to make a small investment today and know exactly how much money you'll receive on a given date in the future.

These bonds--unique in that interest are reinvested, compounding the interest--are particularly advantageous if you're just starting out and have little money to invest. Sold at steep discounts to their face value, the securities allow you to triple, quadruple, even quintuple your low upfront investment. For example, if you invest $174.11 today at 6 percent, you would receive $1,000 (face value) at the end of 30 years. No interest payments are made before maturity, hence the name "zero-coupon bonds." (The coupon rate is the amount of periodic interest paid to bond holders.)

"While zeros pay no current interest, you still must pay taxes on the year-to-year appreciation--which is phantom income," observes Phil Albitz, Certified Financial Planner at Albitz/Miloe & Associates in Torrance, California. "So you're paying tax on money you're not really receiving."

The solution? Buy a zero-coupon bond issued by a state or local entity. The interest compounds free of federal taxes and, in most cases, free also of state and local taxes. If you prefer taxable Treasuries, Albitz suggests including such securities in qualified retirement plans. Zero coupons can be included in a 401(k) that covers you as well as your employees, or in an IRA or Keogh. "You can buy them at a big discount, wait until they mature, then get the total value of the bond but without paying the tax until you withdraw the funds," Albitz says.

The financial advisor, whose firm specializes in retirement planning, strongly urges entrepreneurs to establish a qualified investment plan and says, "Zero-coupon bonds should be one of the components of the investment portfolio." The securities typically are issued in $1,000 increments (face value at maturity), with maturities ranging from one to 30 years. The longer the maturity, the greater the yield.

Zero-coupon bonds typically are purchased from brokerage firms at minimal fees. "But watch for hidden markups," warns Albitz. "Find out first what the `bid' and `ask' [prices] are on the bond; the difference between the two represents the markup." As with buying a car, you may be able to negotiate a better deal with the broker if you know the markup. Or consider a no-load zero-coupon bond fund, which charges no fees.

Although full face value is guaranteed if zeros are held to maturity, they are not appropriate for all investors. Like other fixed-income instruments, they are subject to inflation risk. If interest rates rise, the price of these bonds will fall even more dramatically than other bonds--so you could lose big if you need to withdraw the money before maturity. (The inverse also is true: As interest rates fall, the value of zero- coupon bonds increases rapidly.) "But for someone who will hang on to [a zero] and is satisfied with the locked-in yield," Albitz concludes, "it's a good investment."

Go With The Low

By George M. Dawson

Q. How do I get the lowest interest rate on a loan for my framing and art supplies shop?

A. It's more than just the interest rate. It's the total borrowing costs. Here's the plan:

1. Trim the bank's perception of risk--and your interest rate--with a good business plan, excellent personal credit, relevant business experience and quality collateral like multipurpose equipment and late-model vehicles.

2. Borrow the right amount. No more than necessary, but enough to get the job done. Use a cash-flow projection to frame your needs and plan repayment.

3. Avoid a loan with a prepayment penalty or with penalties for extra .

4. Hammer down upfront fees and points. These are just disguised interest. (100 points equal 1 percent.)

5. Don't build fees and points into the loan itself. This is paying interest on interest.

6. Look for a loan that charges daily simple interest based on a 365-day year, not on a 360-day year.

7. Lenders may require you to keep some percent of the loan amount on deposit with them. Usually this is a bad deal. Offer to pay a higher interest rate and skip the "compensating" balances. Interest costs are a tax-deductible business expense. Idle funds earn you nothing.

8. When you have the final proposal from the lender, ask for a statement of the annual percentage rate (APR) and how it was calculated. This will help you measure one lender against another.

9. Don't get upside down. You must earn more in your business than you are paying in interest. Profits after all expenses but before taxes (PBT), divided by the total assets of your business, should be greater than the APR on the loan. The same is true of PBT divided by the total equity in your business.

Please don't get hung up on the interest rate. Why haggle over a few dollars and lose a loan your growing business needs? Borrowing the right amount and setting an affordable repayment schedule are more critical than interest expense. Free financial calculators at http://www.wheatworks.com can help you figure monthly payments and loan APR.

Contact Source

Albitz/Miloe & Associates, (310) 373-8861


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