 |
 |
|
BUSINESS BASICS CHANNELS 
|
Why Lease Equipment What is brown and black and looks good on an IRS agent? A Doberman Pinscher. Okay, that wasn't nice but how many of us REALLY like the IRS and like paying taxes? Well, today we are going to look at the tax aspects and the economics of leasing versus buying equipment and vehicles. Let's start with the basics. When you buy a piece of equipment or vehicle, you usually have to pay for it in full either by using cash or by financing the balance. After you finish paying for it, you own it. With a lease, you are really only paying for that portion you use and at the end you can give it back or buy it outright. You can have a smaller down payment and smaller monthly payments, but at the end of the lease you own nothing. So why lease you ask? Good question. By leasing you leave money in the bank that can used for other purchases. Since lease payments are usually smaller than regular loan payments, you don't have to pay out as much each month. You don't make use of your bank loans or lines of credit to lease equipment, and in general, a lease obligation is not carried on the balance sheet of your company (an important thing when banks look at your financial statements). Lease payments are generally tax deductible if the equipment or vehicle is used for business. (There are situations where a lease is actually a purchase in disguise and is treated as such, but I won't go into that here). With a purchase you have to depreciate the car over an incredibly long life and pay your CPA a lot of money to fill out depreciation schedules and tax returns. (Wait, that's a good thing isn't it?) Lease terms can be more flexible than purchase terms but be aware that they can hide the interest rate they are charging you. With a purchase, the lender has to disclose the Annual Percentage Rate they charge you. With a lease, there is no such requirement. I saw a lease one time that charged 129% interest. Now comes the good news and bad news about leasing. At the end of a lease, you own nothing. You have a choice to return the equipment, or buy it from the leasing company for its residual value. That means whatever it is worth in THEIR eyes at that time. The problem is that they set the value and if you don't agree, then you have a problem. If you had bought a car and felt it was worth $ 5000 and someone only offered you $ 2000, you would decline their offer. But if a lease company says it is only worth $ 2000, you have to buy it from them and resell it for what you can get, or keep it. Another consideration for leases is that they are not cancelable like a bank loan or other debt. If you need to get out a standard loan you can sell the equipment and pay off the loan, or even refinance it. With a lease, you generally have to pay off the lease in full. So you have to be sure you make the payments when you enter into a lease. Okay, now let's shift gears and talk about car leases (okay, so it was a terrible pun). How do you decide if a lease is right for you or if you should purchase a car? The first thing to consider is how many miles a year you drive. The higher the miles you drive, the more a purchase makes sense. Remember you pay for any excess wear to a leased vehicle. The second thing is how long you like to keep a car. If you keep cars until the wheels fall off, buy it. If you like to trade in frequently and keep a new car in the garage, leasing might be for you. Next, how well do you take care of your cars? Again, excess wear and neglect make a lease much more costly. How much money do you have for a down payment? The less you have, the better a lease looks. How is your credit? Leases usually are only available to people with better credit. Poorer credit may force you into a purchase. And lastly, how do you feel about car ownership? If you like the feeling of owning your new toy, you will have to buy it. But if you don't care who OWNS it, but only that you get to CONTROL it, leasing can be a benefit for you. There are lease versus buy calculators on the internet and from other sources that can help you make a good decision on whether leasing is better for you that buying. My suggestion is that you talk to your CPA, seek out his or her advice and take it. But, hey, I admit I am biased in that direction. So shoot me. So long until next time. |
|