The most trending tax and financial industry issues.

Author Picture

Lane Keeter, CPA

Partner: Tax Consulting, Estate Planning, and Heber Springs Managing Partner

Equipment – the Buy or Lease Decision

The latest round of tax reform has substantially increased the tax incentives and benefits of buying new and used business equipment. Even so, leasing of equipment is still an attractive alternative for many. If you are in business and are considering acquiring additional equipment (or may be in the future), it behooves you to know the pros and cons of both buying and leasing, so let's take a look at those.

Buying Pros

From a purely tax standpoint, buying has the unique advantage of big potential up front tax savings. The combination of first-year bonus depreciation and what is known as the Section 179 deduction can pack wallop to your tax bill.

With first-year bonus depreciation, for most equipment, you can deduct 100% of the cost of both new AND used equipment you purchase (previously it was only available for new assets). In fact, this deduction is automatic unless you proactively elect out of taking it. This full expensing treatment is available through 2022, after which the percentage drops 20% per year until it expires at the end of 2026. Some assets, such as so-called "listed property" (like automobiles) have limits, so be aware of that.

The Section 179 deduction is much like bonus depreciation but is taken by election. Under Section 179, you can elect to take a current deduction for the cost of qualifying new and used business property up to a cost of $1 million. This is available for most types of business furnishings and equipment, but also includes software and qualified real property. The Section 179 deduction, however, is limited by your business income. Further, it is phased out for businesses that have qualified asset additions exceeding $2.5 million.

Another pro of buying business assets is that once you pay for them, they are yours to keep and do with as you please. For assets that you intend to use for a long time (such as those whose useful life is unaffected by changes in technology), this can be a worthy investment.

Buying Cons

The most obvious downside may be the fact that you have to come up with the money to buy the equipment, tying up funds that may be needed elsewhere. Even if the purchase is financed, chances are a significant down payment will be required, and, of course, a loan can affect your credit rating.

Other cons include the risk of obsolescence, and maintenance and repair issues and related expenses, as wells as, the hassle and cost of disposing of the assets once no longer needed.

Leasing Pros

Leasing can be attractive due to cash flow considerations. There are typically cost savings upfront since you do not have to come up with the full purchase price or usually even a down payment. This leaves cash available for other business needs.

Leasing may also be more viable if your credit rating leaves something to be desired or have limited financing options. The lease payments are usually tax deductible as paid, as opposed to a purchase where the asset cost is deducted as described earlier. Caveat: there are certain kind of "leases" that are really nothing more than disguised purchases (usually with a bargain purchase clause at the lease's end); these are treated as a purchase of the asset, not a lease.

Leasing Cons

The most obvious con probably is that you do not "own" the asset, i.e., you have no equity in it, therefore, when the lease is over, you have to give it back and you get nothing in return as you would if you were to sell it.

Another downer is that typically over the long haul, the lease will cost you more than had you bought it in the first place. Also, with a lease, you more than likely are locked in for the entirety of the lease term even if you stop using the asset, or at a minimum may be subject to an early-termination fee of some kind.

So there you have it. A variety of considerations go into whether to lease or buy equipment or other assets for use in your business. Which decision is right for you requires some thought and planning for the future.

Prev Next