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Business Equipment: Should You lease or Buy?

January 5th, 2014

It is not easy to decide whether it is wiser to buy or lease a piece of business equipment.  For most business owners, the first impulse is to buy.  With advantageous depreciation rules, buying is an attractive option.  Lower interest rates make buying equipment over time an affordable option but there may be times when leasing is preferable.

 

  • Capital Conservation.  Purchases normally require a 10% to 20% down payment, whereas equipment leases require a smaller down payment.  Additionally, “soft costs” such as shipping, installation, and warranties can be built into a lease.

 

  • Obsolescence.  If the equipment becomes obsolete before the end of its useful life, leasing the equipment may allow for a “turn back” or upgrade at the end of the lease, thereby keeping the technology current and minimizing repair and replacements costs.

 

  • Urgency.  For expensive equipment that is required immediately, leasing might be the best way to obtain it quickly.  If you purchase, you might be tied up with your lender for some time, providing financial statements necessary for loan approval.

 

  • Deductions.  If you find that you are unable to expense the equipment, a lease might allow for a shorter deduction period compared to depreciation, thereby increasing your tax deductions.

 

Sold on leasing?  Don’t be.  Buying has its advantages also.

 

  • Immediate Deduction.  You may be able to immediately deduct up to $108,000 of the cost of qualified equipment in the year of purchase using the Special IRS Section 179 first-year rules.  This is significant and can reduce your taxes substantially.

 

  • Appreciation.  Some equipment actually increases in value over time.  Buying such equipment can create future equity.

 

  • Useful Life.  The equipment may be valuable and productive long after the lease has expired.  Purchasing will allow you to continue to use that equipment and avoid the need to return or upgrade it at the end of the lease term.

 

As you can see, deciding whether to buy or lease business equipment is not an easy decision.  By consulting with your company’s CPA, you will be able to make the best decision for you and your business. Need more advice? Contact the Tucson Certified Public Accountants at Flowers Rieger today.

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