Originally published in On-Site, ARB’s Construction Industry newsletter.
The construction industry is characterized by intense cash flow challenges. Generally, construction companies don’t get paid until a project or job phase is completed — and subcontractors may have to wait even longer.
As a result, there may be times when you need a quick cash infusion and don’t 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.
Consider the Upsides
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.
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.
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.
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.
Watch out for potential downsides
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’t resume ownership at the end of the lease term unless the sale-leaseback agreement includes a repurchase option.
However, including a repurchase option may create accounting complexities. That’s 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:
- The lease transfers ownership of the asset to the lessee by the end of the lease term,
- The lease grants the lessee an option to buy the asset that the lessee is reasonably sure to exercise,
- The lease term is for the “major part” of the asset’s remaining economic life,
- The present value of lease payments substantially equals or exceeds the asset’s fair value, or
- The asset is of such a specialized nature that it’s expected to have no alternative use for the lessor at the end of the lease term.
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.
In summary, a lease’s characterization affects the timing and presentation of expense recognition. This may, in turn, affect certain financial ratios and operating metrics — such as earnings before interest, taxes, depreciation and amortization (commonly referred to as EBITDA) — that sureties, lenders, and investors monitor.
Important: A lease’s tax characterization may not necessarily follow its GAAP characterization. The differing treatments tend to complicate tax and financial reporting.
Optimize Asset Management
Your construction equipment may have value that you can convert to cash using one or more 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.
This publication is distributed with the understanding that the author, publisher and distributor are not rendering legal, accounting or other professional advice or opinions on specific facts or matters, and, accordingly, assume no liability whatsoever in connection with its use. ©2025
Construction and Real Estate Team Spotlight
Ben Lord is a Principal at ARB specializing in audit and consulting services for employee benefit plans. Ben manages employee benefit plan audits in an efficient, cost-effective way by customizing services to meet a plan’s specific needs. He also specializes in consulting and financial accounting services for construction, real estate development, manufacturing, and professional services firms.
