Nov 25

Growing a small business means reinvesting profits back into the company, often with capital purchases.  The next question that often arises is whether the company should lease equipment or buy it outright in order to receive the greatest financial benefit. Here are a few questions to help you determine which option may be right for you.

 1. How long do you need to keep the business asset? If you’re purchasing an item with a short life due to obsolescence, such as electronic or computer equipment, there are several new leasing options available through the major brands like Dell and Hewett-Packard.  These companies will provide your small business with the latest in computer technology and then at the end of your contract, they will replace the systems with new computers again loaded with all of the most current software and features.  Considering the cost to maintain an IT staff and constantly update and maintain equipment, a leasing agreement may save you not just money but time over the course of one to three years.  

However, if the item you’re purchasing has a longer lifespan or if you don’t require the latest technology updates, purchasing the equipment can save you in the long run.  Once the initial cash is paid for the computer system, periodic system upgrades may only run $150 over three years.  At the standard rate of $40 per thousand to lease the computers, you’re facing a final lease price of $5,760.  Weigh your needs carefully against the impact of the initial cash outlay to see if buying or leasing is a better option for you.

2.  How’s your business’ cashflow? If you’re running on a very tight budget, leasing usually requires substantially less cash upfront in the contract agreement. Leasing can also provide your business with a deduction on your tax return for the entire purchase price even though your business is paying for the item on monthly installments.

3.  Do you need additional tax deductions? By meeting with your small business accountant or tax adviser, you can determine if your tax outlook could benefit from an end of year purchase.  If you buy the item before December 31, 2011 you may be eligible for the Section 179 deduction which allows the business to deduct the entire cost of the item up to $2 million dollars.  Not all items will qualify for the deduction, so talk with your small business accountant or bookkeeper first.  Just remember that the item must be purchased, installed, and operating in the business before year’s end if you want it to qualify.

4.  What type of payment terms do you need? Leasing often provides a much more flexible set of terms than buying. Even if your business is struggling with late payments or less than stellar credit, a lease agreement is usually available with more affordable terms and upfront cash required. However, understand that regardless of whether or not you utilize the asset, you are obligated to make lease payments.  You may be able to end the contract early, but more than likely there will be applicable early termination fees.

5.  Do you need business assets?  The most obvious benefit to purchasing items is that your small business owns the assets and they appear on the profit and loss statement as an ‘asset’. The advantage is especially important when purchasing real estate which usually increases in value over time.  Large equipment such as construction vehicles will hold their value for a long period.

PASBA member accountants bring the collective resources of a nationwide network of Certified Public Accountants, Public Accountants, Enrolled Agents and other practitioners available to answer your tax and financial questions and streamline your business accounting, bookkeeping, and payroll operations. To find a trusted accountant in your area, visit www.SmallBizAccountants.com.

Please be advised that, based on current IRS rules and standards, any advice contained herein is not intended to be used, nor can it be used, for the avoidance of any tax penalty that the IRS may assess related to this matter. Any information contained in this article, whether viewed or subsequently printed, cannot be relied upon as qualified tax and accounting advice.  Any information contained in this article does not fall under the guidelines of IRS Circular 230.

Copyright Information 2011 Professional Association of Small Business Accountants