When Scott opened his business a few years ago, he bought all new equipment. He now needs to replace several pieces. Instead of buying, Scott is considering leasing the equipment.
Cost is the first factor Scott needs to consider. He generally won’t need as much money up front to lease equipment as he will to purchase it. So leasing may leave Scott’s company in a better cash position.
Time frame is another factor. If the equipment will fill only a short-term need, leasing might be the better choice, unless Scott knows he’ll be able to resell the equipment for a good price. In that case, purchasing the equipment may be a better option.
Scott should also consider how soon the equipment will have to be upgraded or replaced. If the equipment will become obsolete quickly, leasing may give him more options. Depending on his lease agreement, maintenance may be included and he could have the choice at the end of his lease to either buy the equipment he has or lease newer equipment.
Owning the equipment and using it in his trade or business will generally entitle Scott to tax deductions for regular depreciation (or a first-year write-off under IRS Code Section 179). Lease payments generally will be tax deductible unless the transaction is characterized as a sale instead of a lease.
Businesses in need of equipment should carefully weigh the pros and cons of buying versus leasing before making a decision. Consult your CPA for the best way to proceed in your situation.
Client Profile is based on a hypothetical situation. The solutions we discuss may or may not be appropriate for you and your business.