To Lease or To Buy - A Common Business Decision
Leasing or buying an asset is an important financial decision that virtually all business owners must make. There are multiple factors that need to be assessed before deciding which is the better alternative for your company. Duration of service of the asset, how rapidly technology advances, how much capital you have to spend, as well as tax implications all go into making the decision. Failure to properly weigh these factors can result in paying more than necessary for the use of an asset.
Checkpoint provided the following definitions of lease and buy:
- A general rule of thumb is that if you are planning on using the asset for less than 70% of its total useful life, then leasing is the better option.
- Assets expected to be used more than 70% of the assets total life should generally be purchased.
If the type of asset you are looking to acquire frequently improves its technology (i.e. releases a newer, better model every year), then it would typically be a better idea to take on a shorter term lease. It is both faster and less costly to replace a leased asset than it is to replace an owned asset.
How much money you have right now greatly impacts the decision of whether to lease or buy. An advantage of leases is that they rarely call for an initial down payment. This allows you to acquire an asset that can possibly generate revenues for your company without substantially affecting your cash. However, in the long-term, leasing has a greater overall cost.
Purchasing, on the other hand, has a much more significant affect on your current cash, but is cheaper in the long run as you do not have to pay interest. Even if you decide to finance the purchase through a lender, a down payment is generally required, so it still has a greater current impact on your capital than a lease.
- Lease payments are generally deductible as ordinary business expenses on your tax return.
- There are two major tax incentives available for purchased assets: section 179 expense and bonus depreciation. For 2012, using section 179 expense you can fully deduct up to $139,000 of your qualified asset purchases. Using bonus depreciation you can deduct 50% of the cost assets purchased in 2012. Bonus depreciation will no longer be available in 2013. There are certain limitations and phase-outs of these expensing options that you should fully discuss with your trusted advisor here at Herbein + Company before making a decision.
The decision of whether to lease or to buy is a very important choice that most businesses must make. Adequately weighing all of the factors briefly discussed above is vital to selecting the best alternative for your company. Failure to do so can result in higher expense than necessary. Saving money anywhere possible is essential for the success of any business.
For additional information contact Douglas C. Miller at email@example.com or your Herbein contact.