Recently, one of our own resident office technology experts was asked to partake in an interview regarding this question: Office Equipment Lease vs Buy, what is the benefits or downsides of each? Here is how the interview went, maybe you’ll find some useful information you can utilize prior to entering into your next office equipment lease?
1. What is the difference between equipment leasing and equipment financing?
Typically, the main difference between an equipment lease and financing (loan) breaks down into a few very distinct areas.
When you lease equipment there is generally the expectation that at the end of the term the equipment must be returned or purchased by some pre-determined value at the expiration of the lease. This value could also vary from a “Fair Market Value” (FMV), to a set percentage or even a set dollar amount. Leasing companies will generally specify those terms in their documentation. A lease will usually have a shorter approval process, require no money down, and allow the consumer more flexibility as it pertains to payment options (i.e. monthly, quarterly, deferred, etc)
A Finance (Loan) will often times require a bit more work to secure the note. They more often than not also require the signer to personally guarantee the note along with the possibility of a “down payment” of some sort. Unlike the lease after the required number of payments the piece of equipment is now “titled” to them. There is no return or further purchase options necessary.
2. How can a business owner determine which option is right for him or her — leasing, financing or purchasing? What factors should be considered?
There are many options when considering the right purchase method:
- What is the purchase price? Honestly anything under $3,000 is going to be more trouble than it’s worth to attempt to finance. The disadvantages are usually higher interest rates, a forced automatic deduction for the payment (either credit card or direct ACH) because there is so little room for non/late payments, and by the time you calculate in documentation and filing fees you’ll be adding a substantial amount to the bottom line.
- How long do you intend on keeping the item? If it’s a piece of equipment that will last for 20 years with no technology implications, then a purchase is the way to go! If this is a piece of equipment that has technological implications and could be “out-dated” in 3-5 years then definitely lease it. If it can’t be supported after a period of time, then just pay for what you use and keep up with the times and stay current with your technology.
- How long has the company been in business? Most leasing companies and banks now require a minimum of 3 years in business with “some” active credit history. Anything less than that will probably force an outright purchase.
- If you decide to acquire via a loan and they ask for a “down payment” is that going to cause a hardship?
- Most direct finances and leases are acquired by a 3rd party, meaning that the vendor that you are purchasing the equipment from is not the direct lender. That is something they “set up” for you. Will that vendor be there for me if something goes wrong? What recourse do I have if the vendor disappears or I have a fall out with them?
- Tax implications (see below)
3. What are the tax implications of these different options? Are you familiar with the status of IRS Section 179 and Bonus Depreciation? Should that be factored into a decision?
I will caveat this with: I am NOT a tax professional and the laws vary from state to state.
Leases are usually expensed every month and the payment is viewed in the eyes of the government as a normal business expense. You are able to show whatever payments were made in that fiscal year as expense. There is no tangible asset though; it brings no added value to the business
Finance (Loans) need to be deprecated over a period of time (usually 5 years) and only the interest paid may be deducted as an expense. Although there are some advantages to being able to depreciate an item over the course of 5 years as it shows as an asset to the business and therefore be viewed as having a value.
Section 179 gives a business a one-time tax break of up to $500,000 (I believe that is the current number) to depreciate or expense the entire purchase, lease or loan in year 1. If a business was very profitable in a given year and they are looking to offset those profits and avoid paying high taxes, it’s a way to reduce their tax exposure. The down side is the “write off” will be used up in year #1.