One of the questions that I am asked most often by owner managed business owners has to do with the businesses’ decision on whether to lease or buy equipment. A lot of business owners focus solely on the cost when many other factors should be analyzed before making the decision. Beyond the cost, the business owners should also consider the life cycle of the equipment, cash flow and overall financial health of the organization, and finally potential tax deductions.
The decision whether to lease or buy equipment doesn’t just apply to large businesses with heavy equipment needs. Almost any equipment required to do business can qualify. I have had clients consider leasing vs. buying decisions on small items such as computers, shop equipment and copiers as well as heavy equipment like cranes, lift-trucks and front-end loaders.
Equipment Life Cycle: I usually begin the conversation with the business owner about the expected life cycle of the equipment. A computer, for instance, is out of date quickly compared to a front end loader that could be useful for 10+ years.
Cash Flow: I will also usually discuss the cash flow necessary to support the monthly payment. This applies to both leasing and buying. A lease is often less than a purchase as financing a purchase usually requires a down payment. Unfortunately, if the lease term extends beyond the useful life of the equipment you could be making payments for obsolete equipment making it more costly. However, a lease makes it possible to purchase the item at a predictable monthly cost and may also make it possible to afford equipment that may be otherwise too expensive to purchase.
Financial Health: The financial health of the business is an important factor to discuss when it comes to leasing vs. buying. With either option the business will have to go through some paperwork. A traditional loan with a bank will likely go through a more rigorous and time-consuming process and require a higher credit profile than you would go through with a leasing company.
Tax Deductions: The tax consequences and their impact on your business are often the most important factor when making the leasing vs. buying decision. Lease payments can be deducted as a business expense on your tax return, reducing the net cost of your lease. When you purchase a piece of equipment Section 179 of the Internal Revenue Code allows you to fully deduct the cost of some newly purchased assets in the year placed in service. In 2019 you can deduct up to $1,000,000 of equipment. The deduction is reduced dollar-for-dollar, but not below zero, for each dollar of first-year expensing property placed in service that exceeds $2.5 million. Although not all equipment purchases are eligible for Section 179 treatment, you can still receive tax savings for business equipment purchases through depreciation deductions.
When it comes to deciding whether to lease or buy equipment there is no correct answer. It always depends on the facts and circumstances surrounding the equipment, the timing and the cash flow needs. Just be certain that you evaluate both scenarios. If you’re seeking further guidance, the professionals in our owner managed business consulting department and I would be happy to assist you. Contact us today.
Written by Scott Sagan.