Cash or Credit? Paper or Plastic? Pay Now or Pay Later?
That’s just a few of the funny ways you can ask yourself a rather simple question– whether you should buy or lease the equipment you need to run your business. While there are lots of pros and cons to both options, in essence the right answer will depend on your firm’s individual situation. If you know what that is, then you will know what decision to make.
So with that in mind let’s take a look at positives and negatives of of both choices. As well the different types of leases, tax incentives, and considerations you need to keep in mind when making your decision.
What is the Right Choice for Your Next Equipment Acquisition?
Leasing equipment can be a good option for SMBs who have limited capital on-hand, but operate in an industry where they need to upgrade their equipment every few years to stay competitive. While buying might be a better option for an established business who believes they can properly maintain their equipment and take advantage of a long useful-life.
Why Lease? Two main reasons: Financial and Practical
The financial reasons for leasing will be familiar to many of you, here’s a quick review:
- Accountants often recommend that companies purchase items that appreciate and lease items that depreciate.
- A lease is an operating expense, not a debt (like a pure loan). As a consequence it doesn’t present on your balance sheet the way a loan does. This helps you keep your firm’s debt-to-equity ratio down. Effectively, leasing eliminates the need to depreciate the asset over 5-to-7 years.
- As opposed to outright purchases, leasing lets you conserve capital for operating costs, additional investments, or savings to protect you against tomorrow’s potential losses.
- Leasing allows you to “match” the use of the machine/asset against the monthly lease payment (“pay as you go”) versus the value over the useful life of the asset. Some believe that “cash” would be better suited to be available for cash flow and/or “mission critical” investments.
- Leasing can allow you to get more or better equipment than you could otherwise afford. At a time when credit is hard to find, leasing can let you get the necessary technology to stay competitive in your industry without over-borrowing. And contrary to loans, where financing is usually limited to 85% of the total asset value, leases can usually be financed for the full 100% of its value.
The practical reasons for leasing are easy to overlook, but no less important:
- Leasing makes it easier to stay up-to-date on rapidly-changing technology. This is especially important if your industry requires capital equipment to produce its product competitively. Whether the equipment in question is a copier, 3-D printer, or forklift, chances are that they day you buy it an OEM somewhere is working to make that equipment obsolete (or at least outdated in the market place).
- Relatively short-term lease terms (3-to-5 years in most cases) can be vital economically for letting your business switch to newer, more productive models when your lease-term is up without an additional big investment. Some leases even allow for early-termination in the case of upgrading mid-term, which is great for capital products that rely on rapid-evolving technologies.
- Leasing also simplifies your businesses processes; allowing you to consolidate all billing and consumable (toner, waste kits, etc.) costs into one bill.
- Many types of leases include scheduled maintenance and supplies. This is a huge benefit to SMBs that often don’t have technicians/mechanics on staff (or capital to purchase them) to handle ongoing maintenance work for your capital equipment.
Why Not to Lease? It Depends on your Situation.
Equally important as knowing the benefits of a lease is knowledge of their drawbacks; and when purchase may be a better option for you and your firm.
There are two main budgetary reasons why purchasing may be a better choice for your business.
One is the tax implications of leasing: large capital expenses can be depreciated against your total income, while not all leases can (though some can, click here to contact one of our representatives and learn more). If you’re looking for expenses to reduce your taxable income, a purchase is better bet. You may also want to consider a lease with a “$1 BO” option here. A $1 BO-option gives you the chance at the end of your lease term (but not before) to buy your device for $1 (literally a single dollar). This will give you ownership, though these types of leases usually carry higher premiums than their Fair-Market-Value counterparts. And you should consider whether you will truly be interested in owning this equipment. While ownership is perhaps the biggest advantage of purchasing, it can also be a disadvantage in the long-run. With time you run the risk of your equipment becoming technologically obsolete, forcing you into a new purchase of equipment whether you have ownership of your current device or not. Further, certain business equipment has very little resale value. A copier worth $6,000 today may drop in value to $1,000 in 5-years. This precipitous drop is especially true for desktop models in our industry, but varies. Either way, don’t underestimate the potential downsides of getting “stuck” with purchased equipment; you may be reinvest in replacing it long before you expected to.
Further, it’s a good idea to read up on Section 179 of the IRS Tax Code, as it offers significant tax advantages for the average SMB looking to purchase capital equipment. Changes in 2020 to the Tax Code have increased significantly advantages for leasing and purchasing capital equipment for small businesses. In 2013, a max tax deduction of $500,000 and a $2,000,000 “spending cap” (the maximum amount that your firm can be spend on office equipment to qualify for the tax deduction. In 2020, the tax deduction limit has more than doubled to $1,040,000. The total purchases spending cap has also increased markedly to $2,590,000. This Section 179 deduction is good on both new and use equipment, as well as off-the-shelf software purchases. So recent changes have made now more than ever an opportune time to lease or purchase office equipment. See below for an example depreciation schedule using the Section 179 deduction:
Making the Decision
Keeping all the aforementioned in mind, you should be able to come to a decision as to whether you wish to purchase or lease your capital equipment (taking into account your industry, technological change, etc.). Leasing will often turn out to be the best choice for more substantial, long-term purchases in industries that change quickly. This is especially true for new companies– frankly, purchasing office equipment is often often out-of-the-question for many new entrepreneurs due to its steep up-front costs. However, businesses rarely lease items that cost under $1,000; and it is usually unwise to do so. Consider a “$1 BO”-option lease, which will give you the option to purchase the equipment at $1, to “hedge your bets” if need be. Finally, your accountant or financial adviser should be the most important voice you listen to when weighing the pros and cons of leasing.
When deciding whether to buy or lease a particular device, try to approximate the “total cost of ownership” (TCO) of that asset. And sure to factor in your potential Section 179 tax-breaks when you do. It’s also important to be realistic about the potential resale value of the equipment if you decide to purchase, as well as other factors such as the possibility of the model becoming obsolete in the near future.
If you want to learn more about your printer options and the benefits of working with Reliable Office Technologies, call our office at (301)-695-0464 to speak with one of our team members or visit our site at . We also look forward to hearing from you on any of our social networks!