Have you ever encountered a time in your business cycle where you needed equipment but either couldn’t qualify for a loan or didn’t have the funding? You may have been in the middle of a growth period or had old machinery that needed replacement. However, you may not have known all your options. For example, if you find yourself in a similar situation in the future, you may consider equipment leasing.
If you need long-term equipment that is expensive to purchase, you may consider a capital lease. These leases offer you ownership at the end of the lease term. Although you receive every benefit you would if you purchased the machinery, you also receive the disadvantages, including maintenance and higher costs. Operating leases allow you to rent your equipment. It does not and will never belong to you. When your lease term expires, you can upgrade, renew or stop leasing your machinery without penalty.
Lease Accounting and Taxation
Your equipment lease is a regular monthly, bimonthly, quarterly, annual, or biannual payment that you can budget. It is accounted for as an operating expense rather than a debt payment. In addition, you can deduct your entire lease payment on your taxes because they are considered operating expenses, while purchased equipment is deducted using depreciation. However, there are times when you can deduct the entire depreciation expense in one year, but most of the time graduated depreciation is required.
There are a few things you should consider before deciding to lease or purchase your equipment. For example, what type of payment can you afford? If you have a seasonal business, you may prefer quarterly or biannual payments during the times when your business is doing great. However, you can also choose monthly payments. The key is that your lease payment is likely to be lower than your loan payment if you purchase the machinery.
Another question you need to answer is whether you want to own the equipment. If you get a loan and purchase your equipment, as long as you make all your payments, the machinery will be yours when you make your final payment. However, some leases also offer ownership upon completion. However, you will likely pay a higher price for the equipment.
Finally, are you in an industry that is consistently advancing technologically? If your industry’s equipment is consistently being upgraded, purchasing may not be your best option because you can upgrade to new equipment at the end of your lease term.
As you analyze equipment leasing versus buying decisions, do your research to find the best option. You may also consider working with a tax professional.