Law firms increased their technology spend by 7.1% during the 12-month period through November 2021, according to Thomson Reuters’ State of the Market Report 2022. The uptick comes despite overall expense cuts. Thomson Reuters also reports that the pandemic has demonstrated the importance of sound financial practices, encouraging many firms to more rigorously manage timekeeping, billings, and collections.
Leasing and financing firms’ technology needs is a sound financial practice that helps firms continue their investments while keeping conservation of capital top of mind. Below are just a few of the financial benefits that improve liquidity, financial flexibility and cut IT costs when leasing and financing your firm’s technology.
1. Leverage Leasing and Financing to Improve Liquidity
Firms are leveraging leasing and financing options as the go-to strategy to manage unbudgeted costs of laptops, desktops, and any variety of assets.
This extends to software as well. Financing software is a strategy that many firms can now leverage to ensure their planned or in progress software projects remain on track and on budget. Many firms are still in the transitional phase as they migrate or upgrade their financial systems software.
Key Benefits of Financing Software to Consider
2. Cut Long Term IT Costs with Asset Management
- Monthly expense vs. total cost – monthly payments may secure a more cost-effective solution over the life of a lease.
- Spreading costs over a 36-to-60-month lease is less taxing on cash reserves, allowing partner distributions to proceed regularly.
- Software costs also carry associated soft costs that may not be factored into an outright purchase price.
- Financing terms may offer more flexibility and incorporate upgrades that would otherwise pose additional after-purchase costs.
Asset management platforms and user policies not only help bolster the firm’s security, but also reduce the firm’s costs in the long run. Even more important than finance costs, unmanaged equipment controls can cause unexpected budget leakage.
CTO’s and IT professionals can use asset management to audit in real time the location, lease expirations, equipment users assigned to assets, and warranty specific information that would inform better decisions from IT staff.
3. Avoid Onerous Terms and Conditions in Lease Agreements
Lease restructures are a time-tested financial strategy to put cash back into your firm. There are a couple of factors to consider here, one of which is whether your current lease agreements are providing adequate flexibility, as well as the useful life of the assets.
The total cost of your Master Lease Agreement (MLA) is not solely determined by the lease rate. Some MLA’s contain onerous terms and conditions that significantly increase the true total cost to your firm. We proactively educate the market about many of these leasing land mines including potentially onerous terms and conditions. Here are a few of which to be aware:
- Fair Market Value Purchase Option for Software and Services. A leasing company that asks for the Fair Market Value for software and/or services financed either by themselves or as part of a hardware package can be extremely expensive. The Fair Market Value that Lessor can charge you the replacement value of the software. Financing implementation services and software financed on a lease can provide a way to stretch these costs out over a term. However, having these fully amortized during the lease term and then added to the cost of hardware at the end of that term could be a negative outcome for your firm.
- Extended Pro-Rata Rental Periods. Installation of a project takes time. However, some Lessors will charge you rent for equipment as it is installed, which can run six months or longer, and in some cases over a year in duration. This can make a lease transaction much more expensive than you originally realized. It can turn a three year lease into something closer to a four year transaction, at a higher, three year lease rate.
- Difficult or Tricky End of Term Notice Provisions. Some lessors want a written notice of that has to be given in a 30 day (or less) window, many times between 240 and 210 days prior to lease end. If you miss this window your options, go away and the lease renews for six to 12 months at the original lease rate.
- Late Return Equals Notice Cancellation. Contracts that stipulate that returning equipment late, anything over 10 days beyond the end of the lease term on one lease negates your notice and you have a one year renewal. This is absurd, but it happens.
4. Sale & Leasebacks and Tax Incentives
- No Return Provision at End of Term. Customer must purchase the equipment or extend the lease. Some contracts that look like three years end up in reality being three and a half or four years long. Do you want to be stuck with obsolete technology?
Sales & leasebacks is a strategy that we are working on with our clients to inject capital back into their firm from equipment they already own and can really help offset un-budgeted expenses. One Am Law 100 client we work with was able to recently refinance their office equipment and gain $5 million back in liquidity.
Section 179 accounting rules help leasing and financing customers save money on taxes at the end of the year and means that for most small businesses the entire cost of qualifying equipment can be written off on the 2022 tax return:
- The deduction limit for Section 179 is $1,080,000 in 2022 up from $1,050,000 in 2021.
This means U.S. companies can deduct the full price of qualified equipment purchases, up to $1,080,000, with a “total equipment purchase” limit of $2.7 million (up from $2.62 million in 2021). This deduction is good on new and used equipment, as well as off-the-shelf software.
- The 2022 Section 179 deduction threshold for total amount of equipment that can be purchased is $2,700,000.
This means that you can purchase more equipment and still have the benefit of the Section 179 deduction. This is the maximum amount that can be spent on equipment before the IRS Section 179 Deduction available to your company begins to be reduced on a dollar for dollar basis. This spending cap makes Section 179 a true “small business tax incentive”.
Conclusion: Flexibility is Key
These are the challenges we face now—and the only thing we know with guaranteed certainty is that things will continue to change as we rise to the challenges laid before us. Great challenges are always met with great opportunities. Ensuring the firm has the flexibility and liquidity to seize the challenges when they come is an important part of the solution as every firm reaches forward to the future.#FinancialManagement#BusinessandFinancialManagement#Leadership#InfrastructureTechnologies