Masonry Magazine June 1965 Page. 19
Special Report:
Which has the Tax Advantage?
TO RENT OR TO OWN
By Elmer H. Jaster, Vice President & Comptroller
Road Machinery & Supplies Co., Minneapolis, Minn.
Contractors who are at all successful understand that to reduce costs (and thus increase profits) it is necessary to use equipment having higher capacities, higher efficiency, higher speeds, greater maneuverability and lower operating costs. But perhaps not as well understood are the financial implications of acquiring such equipment.
The business community today operates in a climate of burdensome taxation. It is indeed a sad commentary on the American scene to observe, for example, that a young, aggressive business can not, because of the income tax bite, accumulate enough working capital through retained earnings to keep pace with and adequately support potential growth. Success seems to be penalized.
There are discussions about tax reform; yet, it seems every time the internal revenue code is "reformed", it emerges more complex than before. So businessmen must rely more and more on a bigger staff of more trained experts to tell them what it is all about. Many of our policies and decisions seem to be based on "tax considerations" rather than sound business economics. This is particularly true when these decisions relate to construction equipment.
As a prime example, in 1963 about 5% of the construction equipment market consisted of rentals. Contractors, incidentally, account for about 55% of distributor sales.
Alvin J. Bytwork spent months of research on the rental business for his doctor's thesis entitled "Renting and Leasing Equipment An Analysis Using The Construction Industry". I shall refer to this work from time to time as the Bytwork study.
Although the study was made principally from the distribution viewpoint, Bytwork suggests that the "own or rent" decision can be examined from two viewpoints: 1) Cost comparisons, and 2) working capital and profit analysis. Although we frequently speak of different kinds of "rentals", for purposes of this discussion we will deal only with short term use without intent to purchase.
Why do contractors rent? Bytwork sent a questionnaire to contractors asking why they rented. They responded as follows:
67% need equipment for a short period.
50% need specialized equipment for one job.
40% easy way to pay for machine for long term.
30% able to deduct from income tax.
25% try out machine before buying.
12% no down payment.
11% minimize maintenance costs.
8% want to use newest machine in the market.
(There were several other answers of lesser percentages. The replies total to more than 100% because many contractors checked more than one answer.) Only one of these major reasons concern taxes.
It is interesting to observe that one of the reasons distributors thought should have been high on the list was conspicuous by its absence. Distributors have long felt that "to conserve working capital" was one of the main reasons why contractors rent. Bytwork's survey indicates this is not so. The conclusion is that the "to conserve working capital" reason has been over-emphasized.
It has been said that a general contractor can never afford to own all types or sizes of equipment that might be used for the kind of work done. The answer may be found in subcontracting specialized operations to other contractors who specialize in such work and can do it more economically than the general can.
Michael Spronck, publisher of Construction Equipment and Materials magazine, has suggested that "much of the subcontracting that is done today is nothing more than part of the rental program. The general contractor is not looking for talent". (He is just obtaining the equipment that is accompanied by an operator). "It gives him a chance to take bigger, more profitable jobs and expand his operation".
This may also help to explain Bytwork's findings that the small contractor with work volume under $100,000 annually owns $15,700 of equipment per
Reprinted with permission of CE News, Official Publication of AED.
MASONRY June, 1965
19