Leasing versus Buying

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Make the Comparison Before Purchasing Business Equipment

When you buy equipment for your home-based business, such as computers, machinery, or cars, you have a choice to buy them or lease them. If you buy equipment, you pay all cash up front. If you lease equipment, you can pay for it over time.

Advantages & Disadvantages Of Leasing

Leasing provides a distinct advantage: You get the equipment now, and you can pay for it over time. This can save your cash for other expenses, can help you to buy more equipment, and can provide funds you need for more raw materials or finished goods inventory. The major disadvantage of leasing is that you pay interest on the amount you finance. You could pay 50%, or even double the original purchase price after paying the cost of financing your lease. For example, you might pay $30,000, or even $40,000, for a $20,000 car.

Advantages & Disadvantages of Buying

The biggest disadvantage to buying equipment is that you pay the entire cost on the day you buy. Unlike with leasing, this cash will not be available for other uses. However, you won’t pay any finance charges if you pay cash up front.

Down Payment and Monthly Payments

If you lease equipment, you may not have to make a down payment, like a financed purchase. However, you may be required to prepay one or more payments, or to provide a security deposit. This increases your effective finance charges.

Interest/Lease Rates Charged; Fees

There are often some fees associated with leases. You will also pay the equivalent of interest on the financed purchase price. This is sometimes called a “lease factor.” Your effective interest rate, including fees and interest, may be similar to that of a consumer credit card: between 10% and 20%. Some vendors will provide lower rates as an incentive for you to buy.

Tax Considerations

Check with your company’s tax advisor to see the tax consequences of leasing vs. buying decisions in your home business. The following are some general issues you should raise with your tax advisor:
· If you purchase equipment, the general rule is that you would have to depreciate it, and spread the tax deduction over a few years.
· Section 179 of the federal tax code may allow you to deduct the entire cost of equipment purchases each year, up to a certain limit. This helps you to include the entire cost of some purchases in your deductions, reducing your tax burden.
· Deductions have the effect of letting the federal government subsidize your equipment. If you lease equipment, generally the entire lease payment can be deductible. If so, your entire lease payment will be paid with before tax money as a trade or business expense.
· If you’re not incorporated, you may be subject to certain phase outs of deductions.

Obsolescence Considerations

If you buy something, you own it. Then you take all of the obsolescence risks. For example, a computer that is fast today may be considered slow two years from now. Some leasing arrangements will allow you to upgrade to the newest and best equipment before your lease term is up, and start over with a new lease. These arrangements typically come from the manufacturers that are interested in higher sales volumes.

Your Credit Rating’s Importance

Your ability to lease may depend upon your credit rating. If you think you may be interested in leasing, be sure to look at your 3-bureau credit report as soon as possible. It is not uncommon for there to be errors in a credit report. Depending on your credit situation, you might not be able to qualify for a credit limit high enough to buy what you want using your own credit card. But vendors will sometimes provide more lenient credit opportunities so they can sell more. You can benefit from vendor lease financing.

Summing it Up

Tax considerations may be the most important factor in your decision to lease vs. buy. But obsolescence or wear and tear issues may be important, too.

Source for Post: Home Business magazine Online

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