Business Equipment: Buying vs. Leasing
Should your business lease or buy equipment? The answer depends on your situation. Leasing equipment can be a good option for business owners who have limited capital or who need equipment that must be upgraded every few years, while purchasing equipment can be a better option for established businesses or for equipment that has a long usable life.
Each business is unique, however, and the decision to buy or lease business equipment must be made on a case-by-case basis. Here’s a look at both options.
Advantages of Leasing Equipment
Leasing business equipment and tools preserves capital and provides flexibility but may cost you more in the long run.
- Less initial expense. The primary advantage of leasing business equipment is that it allows you to acquire assets with minimal initial expenditures. Because equipment leases rarely require a down payment, you can obtain the goods you need without significantly affecting your cash flow.
- Tax deductible. Another financial benefit of leasing equipment is that your lease payments can usually be deducted as business expenses on your tax return, reducing the net cost of your lease.
- Flexible terms. In addition, leases are usually easier to obtain and have more flexible terms than loans for buying equipment. This can be a significant advantage if you have bad credit or need to negotiate a longer payment plan to lower your costs.
- Easier to upgrade equipment. Leasing also allows businesses to address the problem of obsolescence. If you use your lease to obtain items that may be outdated in a short period of time, such as computers or other high-tech equipment, a lease passes the burden of obsolescence onto the lessor. You are free to lease new, higher-end equipment after your lease expires.
The Section 179 Expense Perk
The Section 179 expense perk allows businesses to deduct as much as $250,000 on almost all equipment acquisitions, rather than depreciating them over several years. The maximum purchases allowable to take the deduction remains at $800,000, after which it is phased out. If the acquisition is financed, it must be under a finance agreement or a capital lease vs. an operating lease.
These limits of $250,000 and $800,000 only apply to 2009, however. Unless there is further legislation, these limits will fall to $125,000 and $500,000 for 2010, and then to $25,000 and $200,000 for 2011 and afterwards.
The new law also extends the 50% bonus depreciation in the year acquired. The basis of qualified property is reduced by the additional 50% depreciation before computing the amounts otherwise allowable as depreciation deductions. Additionally, no AMT depreciation adjustment is required for property recovered under the bonus depreciation rules, which will help pull those currently subject to AMT out of their AMT positions.
The Section 179 expensing comes off the top before the additional 50% first-year depreciation allowance is computed. They can be combined. The taxpayer then computes its regular depreciation based on the adjusted basis remaining after the 179 expensing and after the additional 50% first-year bonus amount.
Under the rule, the equipment must be new, and must be purchased and placed in service in 2009. For more detail and an example of how the depreciation works in practice, visit http://www.depreciationbonus.org/.
Note: Readers are advised to seek the advice of their CPA or tax attorney for their specific situation and full ramifications.