Many companies are choosing to lease rather than purchase assets outright. This article analyzes the financial and tax implications of leasing vs buying assets like computers and machinery. Key considerations include upfront costs, ongoing expenses, tax deductions, accounting complexities with leases, and flexibility to upgrade equipment.
Lower upfront costs with leases
Leasing often requires little or no money down, allowing companies to acquire assets without large capital outlays. In contrast, purchasing equipment outright requires substantial upfront investment. Many businesses prefer to allocate cash to other priorities.
Ongoing costs and tax deductions
Purchases are depreciated over time, generating tax deductions for the business. Lease payments are fully tax deductible in the period they are incurred. However, leases often have interest expenses that purchases do not.
Accounting complexity with leases
From an accounting perspective, leases receive much more complicated treatment than purchases. Considerations around asset ownership transfers, residual values, and early terminations make financial reporting more challenging.
Flexibility and ability to upgrade
Leases allow for more flexibility since they are shorter term and equipment can be swapped out. With purchases, companies are stuck with the equipment for longer periods.
In summary, leasing provides lower upfront costs and predictable expenses, while purchasing offers long-term tax breaks and simplicity. Companies should weigh their cash flow, accounting expertise, and tech upgrade cycles when deciding.