We revisit the standard model for valuing lease contracts to explore the necessary conditions it implies for a lease to have a non-negative net tax advantage. While the literature commonly places an emphasis on the depreciation tax-savings benefits as a primary source of the benefits from leasing, we demonstrate that they can never produce sufficient tax savings to explain why that asset was leased instead of purchased. Instead, it is the interest tax savings related to the debt supported by lease payments that are necessary for the lease to have a net tax advantage, not the transferred depreciation write-offs. Additionally, we demonstrate that asset characteristics and contract provisions also have an effect on the net tax advantage of a lease. Because asset characteristics and contract provisions have implications for the agency effects of leasing, our analysis demonstrates that an interaction exists between the tax and agency effects of leasing. Our paper provides a better understanding of what drives tax-motivated leasing and dispels some myths surrounding it.
All Science Journal Classification (ASJC) codes
- Economics and Econometrics