Should You Buy or Lease Business Equipment? How to DecidePat Fontana
Small business owners need equipment to run their business successfully. Depending on the type and size of the business, equipment may include computers, printers, photocopiers, shredders, and perhaps even a business telephone system that includes landlines. While some of these items are quite a bit less expensive than others, the question remains as to whether it makes more sense to purchase your business equipment or to lease it.
Many factors play into your decision, including your budget, your tax situation, and your ongoing need for the latest technology. A computer, for example, can become outdated fairly quickly and innovations around smart equipment are developing every day. How do you decide whether to buy or lease your business equipment?
Understanding the Difference Between Buying and Leasing
When you buy equipment, you own it. You pay the full price for the item, either in total at the time of purchase or by financing it over a longer term. When you own the equipment, you are responsible for its upkeep and maintenance – and replacement, when necessary.
Leasing comes in two forms. An operating lease is much like a traditional equipment rental agreement. Your business does not own the asset and it is not included in your balance sheet. Your lease payments are considered to be operational expenses.
A capital lease is similar to a loan. Even though you technically lease the equipment, as far as your accountant and your balance sheet are concerned you own the asset.
Advantages of Buying Business Equipment
Let’s say you have decided you need a new photocopier for your office. If you have available cash on hand, you may decide to purchase the copier. One of the major advantages in buying is its simplicity. You simply write a check or pull out a credit card, order the equipment, and it’s yours. So, if you don’t want to have to go through the process of filling out leasing paperwork or deciding which type of lease is best for your business, buying might be the right decision for you.
One factor in your decision as to whether to buy or lease your business equipment could be dependent on whether you need the tax deduction. The photocopier you have purchased could be eligible for a business deduction under Internal Revenue Service (IRS) Section 179, which allows for a business deduction that “applies to tangible personal property such as machinery and equipment purchased for use in a trade or business,” or for a depreciation deduction under Section 168.
Disadvantages of Buying Business Equipment
Purchasing that piece of equipment outright takes up your available cash. For the more expensive pieces of equipment, such as the photocopier, that could mean a significant dent in your bank account. When deciding on your options, it would be wise to check your budget to be sure such a large purchase fits into your financial plan.
Technology can be an advantage or a disadvantage. In today’s rapidly advancing world of electronic devices, computers become obsolete quickly. When you buy business equipment, such as a computer or other electronic, you run the risk of having to purchase updated equipment within just a few years. If that happens, you will also find yourself with unusable inventory in the equipment that you’ve purchased and that is now yours.
Advantages of Leasing Business Equipment
Leasing can be advantageous if you do not have the cash available to buy or if you do not want to take out a loan for a major purchase. With a lease, you make regular payments that could be much smaller than loan payments.
Since you do not own the equipment, you can trade it in or trade up for newer equipment. Say you operate a call center and need a number of computers and phone equipment for your team. Buying that equipment could be prohibitively expensive, but a lease will probably be more affordable. Once the time comes to replace the computers, you turn them and replace them with upgraded versions. No need to worry about keeping inventory you can’t use or about trying to sell the items.
Disadvantages of Leasing Business Equipment
Even though the regular lease payments may help your cash flow situation, you may end up paying more for business equipment in the long run by leasing. The total amount you pay for the photocopier could be thousands of dollars more once your lease is done than if you had bought the equipment with one payment.
You also typically cannot depreciate leased equipment. Your decision about buying or leasing equipment may not be an issue of available cash at the moment but could depend on whether you need to be able to deduct or depreciate the items when you file your business taxes.
What Makes the Most Sense for Your Business?
It is best to consult with a financial or tax advisor to determine if buying or leasing is the best option for your business. At Clear View Business Solutions, we work with businesses to help them find every advantage and we’re here to walk you through the pros and cons of all the financial options when you need business equipment. Consider contacting our team today to find out how you can position your business for success. Give us a call at (520) 544-0177 to get started.