Buy or Lease?
Tuesday, July 7th, 2015
When looking to acquire new equipment, it is necessary to weigh the costs and benefits of each contract separately from both a quantitative and qualitative analysis. If you lease, you can preserve the cash flow within your business in the short-term. On the other hand, purchasing could save you money in the long-run because the interest rate for a loan is usually lower than that in a lease contract.
It may be more convenient to lease equipment that requires frequent mechanical or digital updates every few years. Purchasing may be more beneficial to you if the equipment has a longer useful life. In addition, owning the equipment gives you more control over the repairs and maintenance, and you can determine the time to sell the equipment with a more negotiable price in an open market. With leasing, one has to abide by the strict contract.
Another downside of leasing is that under a lease contract, there are generally financial penalties for terminating the lease, as well as late payment penalties and maintenance contracts. With a loan agreement with a financial institution, your costs may also increase due to increased financial reporting requirements, personal guarantees and the requirement to meet financial covenants.
Depending on certain conditions, your lease will be either an operating lease or a capital lease for accounting purposes. For operating leases, you record monthly lease payment as expense. For capital leases, the equipment is capitalized as an asset and it depreciates as an expense over its estimated useful life. If the equipment is purchased, it is capitalized as an asset and the loan is recorded as a liability on the balance sheet.
If you lease, you are entitled to deduct the monthly lease payments from your income.
If you purchase and finance your equipment, you are entitled to capitalize your equipment and claim a deduction for capital cost allowance each year, as well as a deduction for any interest paid.
When trying to figure out whether to lease or buy, one has to carefully analyze the situation to figure out which would be the best decision to make.
This blog is for information purposes only and its contents cannot be used as a substitute for specific tax case advice from HENDRICKS & ASSOCIATE, CPAs.