Should You Lease or Buy: Making the Best Choice
When businesses need equipment for their operations, they have the choice of buying or leasing what they need. This includes everything from cars to tractors and there are pros and cons to every option.
Buying versus Leasing
When you buy, you are responsible for paying the cost of the item, including any financing charges as well as for maintenance and upkeep. You can sell the equipment at any time, or you can keep it for as long as it remains useful and productive. You also can benefit from any associated tax deductions and credits.
If you decide to lease instead, you (the lessee) pay the lessor for the use of the equipment during the term of the lease. You also may have to pay to insure the equipment (e.g., a company car). The lessor is responsible for most maintenance costs, although you likely will pay for upkeep and any wear and tear that is not considered "usual." In addition, you usually are responsible for additional costs if you terminate the lease before its maturity date. When the lease ends, you simply return the equipment or buy it at an agreed-on price (usually its then-fair-market value). Alternatively, you can renew the lease.
Businesses often choose to lease equipment rather than buy it either because:
- The upfront costs are lower, freeing up cash;
- The equipment has a short useful life and will need to be replaced quickly; and
- Lease payments on business equipment often can be used as a deductible business expense, offsetting any finance charges.
As always, it is important to look at the tax and other business consequences of your decision before you sign a lease. Contact us if you need help evaluating your lease options.