Month: January 2020

Find out what your annual and monthly depreciation expenses should be using the simplest straight-line method, as well as the three other methods, in the calculator below. The sum-of-the-years’ digits (SYD) method also allows for accelerated depreciation. There are specific tax consultants specialized in bonus depreciation (or other depreciation-related tax deductions). For the most up-to-date and relevant information, consult one of these advisors. Accumulated depreciation is a contra asset that reduces the book value of an asset. Accumulated depreciation has a natural credit balance (as opposed to assets that have a natural debit balance).

• Tax deductions reduce the amount of earnings on which taxes are based (by reducing the value of these assets on a company’s income statement), thus reducing the amount of taxes owed.
• Also learn which depreciation method is suitable for your business, and how to claim it on your taxes.
• Small business owners can use depreciation to recoup some of the cost of an asset over its lifespan.
• Bonus depreciation allows a higher but less controllable depreciable tax strategy compared to Section 179 deductions.

For example, if a company had $100,000 in total depreciation over the asset’s expected life, and the annual depreciation was $15,000, the rate would be 15% per year. Yes, businesses can deduct and depreciate 100% of the cost of a vehicle or truck under bonus depreciation rules. Note that this will be different than Section 179 rules; though a vehicle or truck is often a qualifying asset, it will be subject to a deduction up to a specific dollar amount. Also, luxury vehicles are limited by the luxury automobile limitations in depreciation.

Double-Declining Balance (DDB)

This method is good for businesses that want to write off equipment with a quantifiable and widely accepted (i.e., based on the manufacturer’s specifications) output during its useful life. Make sure you have a method in place for tracking your use of equipment, and expect to write off a different amount every year. Under this method, the more units your business produces (or the more hours the asset is in use), the higher your depreciation expense will be. Thus, depreciation expense is a variable cost when using the units of production method.

SYD suits businesses that want to recover more value upfront, but with more even distribution than they would otherwise get using the double-declining method. The SYD method’s main advantage is that the accelerated depreciation reduces taxable income and taxes owed during the early years of the asset’s life. The main drawback of SYD is that it is markedly more complex to calculate unfavorable variance definition than the other methods. This method, which is often used in manufacturing, requires an estimate of the total units an asset will produce over its useful life. Depreciation expense is then calculated per year based on the number of units produced that year. This method also calculates depreciation expenses using the depreciable base (purchase price minus salvage value).

What assets cannot be depreciated?

On the other hand, Section 179 deductions were limited to $1,080,000 for 2022 (based on $2,700,000 capital equipment spend). A liability is a future financial obligation (i.e. debt) that the company has to pay. Accumulation depreciation is not a cash outlay; the cash obligation has already been satisfied when the asset is purchased or financed. Instead, accumulated depreciation is the way of recognizing depreciation over the life of the asset instead of recognizing the expense all at once.

Types of Depreciation With Calculation Examples

On an income statement, depreciation is a non-cash expense that is deducted from net income even though no actual payment has been made. On a balance sheet, depreciation is recorded as a decline in the value of the item, again without any actual cash changing hands. This is a simple way to depreciate the value of an asset based on how frequently the asset is used. “Units of production” can refer to something the equipment makes — like the number of pizzas that can be made in a pizza oven, or the number of hours that it’s in use.

Activity Methods

Therefore, when the usage is high, the asset depreciates at a higher rate and vice versa. Usually, this method for calculating depreciation is used for processing or manufacturing equipment. Depreciation is an accounting method used to demonstrate the expense of using a business asset over a certain period. The salvage value is typically set at a percentage slightly less than the original cost, and may vary depending on the type and condition of the depreciable asset. Depreciation is used to reduce the amount of income that is subject to tax, but it can’t be deducted in the year the asset was purchased.

They take the amount you’ve written off using the accelerated depreciation method, compare it to the straight-line method, and treat the difference as taxable income. The double-declining balance (DDB) method is an even more accelerated depreciation method. It doubles the (1/Useful Life) multiplier, making it essentially twice as fast as the declining balance method. Different companies may set their own threshold amounts to determine when to depreciate a fixed asset or property, plant, and equipment (PP&E) and when to simply expense it in its first year of service. For example, a small company might set a $500 threshold, over which it will depreciate an asset. On the other hand, a larger company might set a $10,000 threshold, under which all purchases are expensed immediately.

Tax lives and methods

Continuing to use our example of a $5,000 machine, depreciation in year one would be $5,000 x 2/5, or $2,000. Thomas J Catalano is a CFP and Registered Investment Adviser with the state of South Carolina, where he launched his own financial advisory firm in 2018. Thomas’ experience gives him expertise in a variety of areas including investments, retirement, insurance, and financial planning. In some cases, deprecated features may continue to work without any problems. In other cases, deprecated features may stop working entirely or may cause other issues that make usage difficult. When a feature is deprecated, it’s important to understand why it is being deprecated and what the developers recommend as a replacement.

Each year the contra asset account referred to as accumulated depreciation increases by $10,000. For example, at the end of five years, the annual depreciation expense is still $10,000, but accumulated depreciation has grown to $50,000. It is credited each year as the value of the asset is written off and remains on the books, reducing the net value of the asset, until the asset is disposed of or sold. Let’s imagine Company ABC’s building they purchased for $250,000 with a $10,000 salvage value.

Since these bonds are used to receive exemption on capital gains from sale of an asset held for a long period, you can invest in 54EC bonds if you have received capital gain from selling a property. This eligibility provision ensures that you fulfil the conditions necessary to claim tax benefits under section 54EC. It is advisable to consult a tax professional or financial advisor for proper guidance to understand the specific requirements and implications of investing in capital gains securities.

• The investor will not be qualified to receive the tax advantages the bonds offer if the investment is not made within this window.
• Despite the fact that return is low, the interest is taxable and it has a three year lock-in.
• Our GST Software helps CAs, tax experts & business to manage returns & invoices in an easy manner.
• For example, apart from property, sale of say non-equity mutual funds, bonds, debentures, gold, jewellery or even gold ETFs etc. may result in long-term capital gains.
• However, you need to buy these bonds within six months of selling property.

These issuers are highly rated by the rating agencies which makes their bonds to be at low risk. Before purchasing capital gains bonds, investors should carefully consider their investment objectives and risk tolerance. These bonds are a good choice if you want to reduce your capital gains taxes and have long-term investment goals.

IIFL Samasta Finance Limited- A Review of Bond Public Issue

Individuals, Hindu Undivided Families (HUFs), and corporate entities are eligible to invest in work in process inventory. This decision might be because the government told NHAI to be careful about borrowing money for the next three years, so they don’t end up owing too much. NHAI already has a lot of debt, around ₹3.44 trillion as of January 2022. We hope that you are well versed with the meaning of 54EC bonds; let’s shift our focus to other dimensions. In this article, we will discuss various dimensions of these bonds and how they can help you in reducing your tax liabilities.

If you choose to invest physically, only fund the account with an account payee cheque or a demand draft. When investing through the demat form, use your broker or a depository participant to process the electronic payment via NEFT or RTGS, and be sure to include the UTR number on the form. Check to see if the bonds are still available for investment after you have selected the issuer. This is available for verification via a financial advisor or on the issuer’s website.

Additionally, to avail of benefits under section 54EC, it is critical that investment is done within 6 months of the sale of the asset. 54EC Bonds are for investors looking to economise capital gain taxes. The assessee has invested the amount of capital gain (wholly or partly) in the long term specified assets. RR has been an authorised broker/arranger with all issuers of Capital Gain Bonds since their inception. RR is also among the top mobilizers of capital gain bonds in India.

One advantage of buying bonds is that they’re a relatively safe investment. Another benefit of bonds is that they offer a predictable income stream, paying you a fixed amount of interest once or twice. Individuals who have sold their property and received capital gains. Please note that by submitting the above mentioned details, you are authorizing us to Call/SMS you even though you may be registered under DND. The maximum investment amount related to these bonds is ₹ 50 lakh in every financial year.

Effectively he will end up investing Rs 80 in the bonds as he saves a tax of Rs 20. At the rate of 6%, he earns Rs 6 every year and at the end of three years, he gets his original investment back. The money used to purchase 54 EC Bonds must come from long-term capital gains realized from selling any asset, including shares, real estate, or buildings. The bonds are issued by government-approved entities and are subject to tax benefits under Section 54EC of the Income Tax Act.

Capital Gain Bonds cannot be sold until the bond’s maturity date. Save taxes with Clear by investing in tax saving mutual funds (ELSS) online. Our experts suggest the best funds and you can get high returns by investing directly or through SIP. Download Black by ClearTax App to file returns from your mobile phone. BondsIndia is a brand name of Launchpad Fintech Private Limited, an e-business platform for Fixed Income securities that uses technology as a means to provide quality & real-time financial solutions to users.

SDLs: Safeguarding Your Investments with State Government Bonds

No, there is no limit to the number of 54EC bonds that can be purchased by an individual. However, as mentioned above, the maximum amount that can be invested in these bonds is Rs. 50 lakhs per financial year. Section 54EC of Income-tax Act provides exemption in respect of long term capital gain which arises during sale/transfer of Land or building or both. There is no upper limit on the amount that can be invested in these bonds, however, the maximum deduction that can be claimed under Section 54EC of the Income Tax Act, 1961 is Rs. 1.5 lakh in a financial year. Capital gain bonds come with zero risks of repayment and interest.

PFC (Power Finance Corporation)

Clear can also help you in getting your business registered for Goods & Services Tax Law. (b) a deduction from the income with reference to such cost shall not be allowed under section 80C for any assessment year beginning on or after the 1st day of April, 2006. Top website in the world when it comes to all things investing.

How to calculate the tax exemption by investment in tax saving bonds

These bonds are specifically designed to offer tax exemptions on long-term capital gains made by investors. Investing in 54EC Bonds can be a good option for investors who are looking for tax benefits and a guaranteed return. These bonds are issued by government-approved entities and offer tax benefits under Section 54EC of the Income Tax Act, 1961. By investing in these bonds, investors can claim deductions on long-term capital gains, which can help reduce their tax liability. Section 54EC of the Income Tax Act provides a tax-saving opportunity for individuals selling long-term immovable property.

Investing in 54EC Bonds can also help diversify an investor’s portfolio. By adding this type of investment to their portfolio, investors can spread their risk and reduce the impact of market fluctuations. However, it’s important to note that while 54EC Bonds offer tax benefits and a guaranteed return, they may not be suitable for everyone. Investors should carefully consider their financial goals, risk tolerance, and investment horizon before investing in these bonds. The 54ec capital gain bonds are tax exemption bonds, allow you to avoid paying tax on capital gains arising from selling property. These bonds continue to be tax exempted, and no tax is deducted at the source.

Additionally, the capital gains that are invested in these bonds must be long-term capital gains, which are gains from the sale of an asset that was held for more than 2 years. You can receive tax exemption under IT section 54EC by investing in these bonds. However, the interest earned is taxable as per the income tax slab. You will need to declare capital gain from 54EC bonds under your return filing since no tax is deducted at the source. 54 EC bonds are one of the most popular measures to save tax accrued on long-term capital gains. However, it is important that you invest in these bonds within the stipulated time frame to avail the tax benefits.

It occurs when a company that uses the last-in, first-out (LIFO) inventory costing method liquidates its older LIFO inventory. Tom will be taxed on the equity interest that he received as a result of his labor. Since the business was worth the value of its assets ($1,000) at the time that Tom received an interest in the business, he will be taxed as if he received $500 for his labor. A financial statement measuring the profit or loss of a business � income less expenses � for an accounting period.

• One of the most obvious reasons is the ownership restriction for certain types of entities, such as a sole proprietorship, a partnership, a limited liability corporation, or the S corporation 75-owner rule.
• For instance, phantom stockholders maintain no right to vote, and may not be eligible for dividends, depending on the deal’s structure.
• Managing your phantom profit formula is a sure way of improving your net profit.
• These are usually the result of accounting practices or changes in market conditions rather than real economic gains.
• Even a number of the most famous entrepreneurs actually have little cash readily available; the wealth is tied up in the firm.

Phantom stock plans can be a valuable method for companies that seek to tie incentive compensation to increases or decreases in company value without awarding actual shares of company stock. Here are answers to nine frequently asked questions about phantom stock plans and what they could mean for your company. Phantom income occurs when an individual is taxed on the value of their stake in a partnership (or another equivalent agreement), even if they do not receive any cash benefits or compensation. Phantom income can pose challenges for taxpayers when it is not planned for because it can create an unexpected tax burden.

Detailed Inventory Control Calculations

For example, if a company sells a piece of equipment for more than it paid for it, the difference would be considered a one-time gain. While this can be a source of revenue, it does not necessarily reflect an increase in the company’s value. Phantom stock plans are deferred compensation plans and, as such, must be designed and documented to conform to the requirements of section 409A. A company can grant an employee a designated number of phantom stock units or a percentage interest in the company’s value pursuant to a prescribed valuation method; this can be done once or multiple times. However, unlike actual stock, the award does not confer equity ownership in the company. In other words, no actual stock is ever awarded to the employee under a phantom stock plan.

Each kind of enterprise is completely different, and brings with it it’s personal distinctive complexities to contemplate. A key valuation consideration is that the phantom share liability not dilute the worth of the corporate’s equity shares, rather, remain equal in value to the equity shares. Therefore, a circular how to calculate phantom profit, or iterative calculation is important to make the phantom and fairness share value equal.

How do I track my gains and losses automatically?

This method eliminates the need to track adjustments to the company’s actual share count. The number of shares to be allocated to employees simply becomes a fractional sub-set of the available hypothetical shares. Phantom stock is deferred or incentive compensation which involves a promise to pay an amount to an employee at some future date.

profitability index

Tracking some revenue metrics manually may lead to many errors that could lead to inflated figures. Subscription-based companies are especially vulnerable to such errors, and they can benefit fromProfitWell Metrics. The lower cost of goods sold offsets the higher cost of goods purchased . A business executive once stated, ‘Depreciation is one of our biggest operating cash inflows’. However, the LIFO assumption treats the most recent purchase as if it is the most expensive purchase.

What is phantom profit in accounting?

The phantom stock plan should indicate the number of phantom stock units or the participation percentage interest to be granted to the employee. One may calculate the profit margin with the selling price, which is taken as base times 100. At the same time, the profit percentage or markup is the cost price percentage obtained as a profit on the cost price top. If the asset is sold for more than the taxpayer’s cost basis, the taxpayer has a capital gain. Also, companies can embrace provisions in a phantom inventory settlement that “forfeits” any phantom stock benefits if the worker in query departs the company earlier than the agreed vesting completion date.

While not all manipulation could be detected by looking at Income and Balance sheet, many manipulations can be detected by way of the trained eye. Although partnerships do not have common stock, as noted above, entities taxed as partnerships, including LLCs, can implement plans very similar to phantom stock child and dependent care credit plans. In the case of a partnership, however, the value of a phantom stock unit is tied to partnership equity value rather than common stock value. Because the phantom stock units are not actual equity in the partnership, such a plan should not raise any concerns over partners being considered employees.

The terms phantom profits or illusory profits are often used in the context of inventory (but can also pertain to depreciation) during periods of rising costs. The method used for valuation should take into account adjustments that the parties agree are appropriate. For example, a company could exclude gain or loss attributable to operations or sales of certain divisions of the company.

Generally, 54EC bonds are issued by infrastructure companies that have support from the government. Thus, the risk quotient is very low in purchasing these bonds. However, these bonds cannot be sold since they are not listed on the stock exchange. Since these bonds are used to receive exemption on capital gains from sale of an asset held for a long period, you can invest in 54EC bonds if you have received capital gain from selling a property. However, you will not be able to get the tax exemption benefits under section 54EC. The income earned from the long-term capital gains will be taxable from the year you obtained the loan.

• Income tax section 54EC discusses the benefits of Capital Gain Bonds.
• Under Section 54EC of the Income Tax Act, a capital gains bond serves as a financial instrument that offers individuals a tax-saving advantage on their long-term capital gains.
• These capital gain bonds are issued by selected entities such as the Rural Electricity Corporation (REC) or the National Highways Authority of India (NHAI).
• Short-term capital gains cannot be used to avail of the tax benefits of these bonds.
• RR has been an authorised broker/arranger with all issuers of Capital Gain Bonds since their inception.

Last but not the least, it may be noted that these Sec. 54EC bonds may be used to save tax on any long-term capital gain and not necessarily only from sale of property. For example, apart from property, sale of say non-equity mutual funds, bonds, debentures, gold, jewellery or even gold ETFs etc. may result in long-term capital gains. These gains can be saved from taxes by investing the amount in the 54EC bonds as discussed. Selling your capital assets for a generous amount of profit is surely a moment of joy, but it also comes with capital gains taxes.

Bonds eligible for exemption under section 54EC of the Income Tax Act

The maturity date of the 54 EC bonds is five years from the date of issuance. Understanding the step-by-step process or investing guide for 54 ec bonds with RKFS is crucial before making any investments. Save taxes with Clear by investing in tax saving mutual funds (ELSS) online. Our experts suggest the best funds and you can get high returns by investing directly or through SIP. Download Black by ClearTax App to file returns from your mobile phone.

• 54EC bonds are issued by government backed infrastructure companies, which reduces the risk involved in purchasing such bonds.
• After completing all the above-mentioned formalities, your investment in these bonds would be complete.
• In case of the untimely death of a bondholder, the issuing entity shall recognise the administrator of the deceased.
• 54EC bonds can be issued only by specific government-backed companies.
• Section 54EC of the Income Tax Act provides a tax-saving opportunity for individuals selling long-term immovable property.

These bonds are issued by government-approved entities and offer tax benefits under Section 54EC of the Income Tax Act, 1961. By investing in these bonds, investors can claim deductions on long-term capital gains, which can help reduce their tax liability. Capital gain bonds, also known as 54EC bonds, are tax exempt bonds that allow investors to enjoy tax exemptions, under section 54EC, on capital gains made from property sale. Investors can purchase 54EC bonds to reduce the long-term capital gains tax on income from sale of immovable property. These bonds are financial instruments that are issued by certain government entities or organizations for the purpose of providing a tax-saving investment option to investors.

Sec 54 EC – Capital Gains Bonds

Hindu Undivided Family can make investments through the Karta of the family. The amount of maximum exemption is 50 lacs per PAN and per financial year. Individuals, Hindu Undivided Families (HUFs), and corporate entities are eligible to invest in 54EC Bonds.

Lock-In Period of the Capital Gain Bond

You can apply for the 54 EC bonds offline (Physical) and online. Schedule a call with an investment expert to get complete help regarding investment in 54EC Bonds in India. Capital Gain Bonds are mentioned under Income Tax section 54EC.

What are the benefits of investing in Section 54EC bonds?

If you have received capital gain from selling a property, you can invest in these bonds to avoid paying capital gain tax. You can receive tax exemption under IT section 54EC by investing in these bonds. However, the interest earned is taxable as per the income tax slab.

If you have any doubts or queries and want specialized advice from experts at SBNRI, contact us using the button below. The maximum investment amount related to these bonds is ₹ 50 lakh in every financial year. Moreover, in terms of the number, you can purchase a maximum of 500 bonds. With just over a few months left in the current tax year, many of us would already be doing year end tax planning and sussing out options to invest to either gain a tax deduction or tax exemption.

Who can issue Capital Gain Bonds?

This is available for verification via a financial advisor or on the issuer’s website. Investors may purchase 54 EC bonds in physical or demat form, depending on their preference. Additionally, purchasing 54EC Bonds can aid in portfolio diversification for investors. Investors can distribute their risk and lessen the impact of market fluctuations by including this kind of investment in their portfolio. The amount should be invested within a period of 6 months from the date of transfer. Since the interest rate on these bonds are fixed, there is no need to keep an eye on interest rate fluctuation.

Where Ending PP&E denotes the current period’s Property, Plant, and Equipment (PP&E) balance, and Beginning PP&E signifies the prior period’s PP&E balance. This formula effectively captures the change in PP&E over a given period, crucial for understanding a company’s investment reporting partnership tax basis in tangible assets. In 2021, this company reported the value of all fixed, long-term assets as $3 million. Due to the sale of some office space and changes to software licensing, this company reported the value of these assets in 2022 to equal $2.5 million.

• The current period PP&E can be calculated by taking the prior period PP&E, adding capital expenditure (Capex), and subtracting depreciation.
• Capital expenditures are often employed to improve operational efficiency, increase revenue in the long term, or make improvements to the existing assets of a company.
• The cash flow to capital expenditures ratio measures the ability of a company to purchase capital assets using the cash generated from its operations.
• Capital investments in physical assets like buildings, equipment, or property offer the potential to provide benefits in the long run but will need a large monetary outlay initially.

This sets CapEx apart from regular expenses, which are reflective of day-to-day operational costs and are expensed on the income statement. CapEx are the investments that companies make to grow or maintain their business operations. Unlike operating expenses, which recur consistently from year to year, capital expenditures are less predictable. For example, a company that buys expensive new equipment would account for that investment as a capital expenditure. Accordingly, it would depreciate the cost of the equipment over the course of its useful life.

Key Differences Between CapEx, OpEx and Revenue Expenditures

In contrast, a low ratio shows that a company may not have enough funds available to make capital purchases. Sometimes it can be challenging to know when to deduct a repair or improvement as an expense or treat it as a capitalized asset. A repair shouldn’t add significant value to the asset and therefore; should be expensed. An improvement should be treated as a capitalized asset if the improvement increased the asset’s value, extended its useful life, or created a new use for the asset.

These expenses are essential for maintaining and building relationships with clients, suppliers and other business stakeholders. Capital Expenditure (CapEx) is unequivocally regarded as an investment in long-term assets rather than an expense. When companies allocate funds for CapEx, they are making strategic investments in assets like office buildings or production machinery, designed to yield enduring value over an extended period. Capital Expenditure (Capex) refers to a company’s long-term investments in fixed assets (PP&E) to facilitate growth in the foreseeable future. These are capital expenses made to acquire long-term assets that will be used in business operations.

• She is a financial therapist and transformational coach, with a special interest in helping women learn how to invest.
• However, borrowing money leads to increased debt and may also create problems for your borrowing ability in the future.
• CapEx purchases are recorded as assets on the balance sheet of the company’s financial statements, rather than expenses on the income statement.
• Of this, it recorded $39.44 billion of property plant and equipment, net of accumulated depreciation.

R&M is seen as not changing the underlying long-term value of the asset, therefore maintenance costs are almost always expensed immediately. Capital expenditures are larger, often one-time purchases of fixed assets that are intended to be used for a long time. If a company buys a new vehicle for the company fleet, the vehicle is considered a capital expenditure. A capital expenditure (CapEx) is the money companies use to purchase, upgrade, or extend the life of an asset.

How Do Capital Expenditures Impact the Financial Statements?

Spending on investment activities, while negative on the cash flow statement as a capital outlay, can be positive indicators of a firm’s potential for future growth. The purchases or cash outflows for capital expenditures are shown in the investing section of the cash flow statement (CFS). When a company buys equipment, for example, they must show the cash outflow on their CFS. In addition, the equipment must also be recorded within total assets on the balance sheet. By contrast, when investing cash flow balances are highly positive on the cash flow statement, which indicate inflows, this might reflect divestment of investment or capital assets. Such divestitures might not be a good signal for the firm in the long term, if they impede the growth or maintenance of the company’s business operations.

Management’s Role in Capital Expenditures

Revenue expenditures, on the other hand, may include things like rent, employee wages, and property taxes. Operating expenditures are smaller, usually more frequent purchases that support the operations of the company by secure value in the short-term. For example, if the company goes to fill up the new fleet vehicle with gasoline, the entire benefit of the full tank of gas will likely be utilized in the short-term. Whereas the vehicle will probably still have value next year, the tank of gas will be long gone. Also, capital expenditures that are poorly planned or executed can also lead to financial problems in the future.

Efficient Capital Expenditure Budgeting Practices

Examples of operational expenditures are administrative salaries, utilities expense, and office supplies. Since they are charged to expense in the period incurred, they are also known as period costs. Examples of capital expenditures include the development of buildings, vehicles, land, or machinery expected to be used for more than one year. When acquired, they are treated as CapEx to recognize the benefit of each over multiple reporting periods.

Examples of capital expenditures

Based on the useful life assumption of the asset, the asset is then expensed over time until the asset is no longer useful to the company in terms of economic output. Whether an item is capitalized or expensed comes down to its useful life, i.e. the estimated amount of time that benefits are anticipated to be received. Hence, if growth capex is expected to decline and the percentage of maintenance capex increases, the company’s revenue should decrease from the reduction in reinvesting. For example, the act of repairing a roof, building a new factory, or purchasing a piece of equipment would each be categorized as a capital expenditure.

Types of Revenue Expenditures

This will help ensure that a business does not overspend on projects and put itself at financial risk. However, the decision to start a project involving much capital expenditure must be carefully analyzed as it will have a significant impact on the financial position and cash flow of a company. A high ratio reveals that a company has a lesser need to utilize debt or equity funding since it has enough cash to cover possible capital expenditures.