One of the most common cash-flow considerations business owners face is making the right choice between leasing or buying equipment. There are plenty of good tools available to help you analyze the decision on a dollars-and-cents basis—such as this Excel template and this online calculator, but often there are non-financial factors that must be considered as well.
Making the right buy-vs.-lease decision requires an understanding of some basic characteristics and how they affect cash flow and asset management, says Tim Lemmons, a business consultant and educator at the University of Nebraska-Lincoln. Leasing generally entails a smaller initial outlay of capital than buying does, and lease payments are often lower than traditional installment loan payments, resulting in less liability on the balance sheet. However, when you buy a piece of equipment you gain asset value on the balance sheet, and that value may be used as collateral against other loans. Owned equipment does not require a security deposit as leased equipment often does, so capital that would have been tied up for the duration of the lease is available for other purposes.
There are three major kinds of leases: financial, operating, and sale/leaseback.
- Financial leases
- Operating leases
- In a sale/leaseback scenario, often used for buildings and other commercial property, you sell an asset you own to another party and immediately lease it back for a set period of time. The capital that would otherwise have been encumbered by the asset is freed up for use elsewhere in your business.
In most head-to-head scenarios, buying equipment usually ends up costing less than leasing it, as long as you can take advantage of associated tax benefits, particularly the Section 179 deduction, which essentially allows businesses to deduct the full purchase price of qualifying equipment and/or software purchased or financed during the tax year. However, two of the most attractive aspects of Section 179 expired at the end of 2013. Unless Congress acts to change the law, the limit on capital purchases eligible for the 179 deduction and the maximum deduction allowed drop from $2 million and $500,000, respectively, in 2013 to $200,000 and $25,000 (plus an adjustment for inflation) in the current tax year. In addition, the 50 percent bonus depreciation allowed for tax year 2013 has also expired.
The least-vs.-buy decision is one that can only be made on a case-by-case basis, and making that choice is only the start of the process. If you decide leasing makes the most sense, you need to choose your leasing company carefully. Choosing the right financial partner if you decide buying is the best option is just as important.
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