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Is Leasing Equipment Right For Me?
Why consider a lease?
Today in the United States, the Wall Street Journal estimates that over 30% of all capital equipment is leased rather than purchased. The same WSJ article determined 8 out of 10 companies in the U.S. lease their equipment. So what are the compelling financial reasons that so many companies are opting for leasing when they buy their equipment?
Whether your business is large or small, there are many advantages to leasing equipment.
Leasing offers a wide range of options and flexibility that purchasing equipment or standard loans do not. Leases are easily customized to meet a customer’s specific financial goals. From no cash up front, or deferred payments for the first 90 days, to Fair Market buyouts, 10% buyouts, or $1 buyouts, leasing offers the consumer the most flexibility with the widest range of options. Lease terms for capital equipment range from 12 months to 84 months and can be devised to keep up front costs low, or give the lowest monthly payments, or make the end of lease buyout as low as possible. No payments for 90 days is a very popular option, as most equipment installations are cash intensive up front. All of these options can be met with a lease.
Leasing offers the possibility of financing 100% of the purchase price often rolling in “soft costs” like installation, training, and software. This allows a business to manage cash flow better and actually pay for the equipment out of the cash generated during its’ use. Typical leases are handled as operating expenses rather than debt, keeping credit lines available for other purposes. While buying may be easier by simply plunking down cash with no paperwork, it can tie up liquid assets and lines of credit that may be needed to operate the business.
Loans often require borrowers to pledge other business assets or even personal assets to guarantee the loan. Leases more typically use the equipment as collateral not encumbering other business assets. The biggest downside of leasing versus purchasing equipment is that it will cost more in the long run because of the interest associated with the lease. But even this can be mitigated through tax savings.
Perhaps the biggest advantage of leasing equipment in the current tax climate is the IRS Section 179 deduction. House Resolution 8, the American Taxpayer Relief Act of 2012 boosted the allowable 2013 Section 179 deduction to $500,000. The threshold of total equipment purchased is now $2,000,000 giving businesses a bonus depreciation of 50% of every dollar over the $500,000 limit. Unless Congress changes the law this is the final year for these kinds of limits – Section 179 is slated to decrease to just $25,000 in 2014.
With few exceptions all business capital equipment qualifies for this deduction. It must be placed into service between Jan 1, 2013 and Dec. 31, 2013 and the business must show a profit in order to deduct the full amount. All businesses that lease less than $2,000,000 in business equipment during tax year 2013 should qualify for the Section 179 Deduction. If a business is unprofitable in 2013, and has no taxable income to use the deduction, that business can elect to use 50% Bonus Depreciation and carry-forward the deduction to a year when the business is profitable. Check with your accountant or tax attorney for specific information for your business and the tax advantages of leasing.
In the simplest terms, if a business leases a machine for $250,000 it can deduct the full amount straight from their bottom line before taxes. If they are in a 35% tax bracket that means that because of the first year 179 deduction, the business saves $87,500 of the purchase price of the equipment in tax savings the very first year. Essentially Uncle Sam is paying $87,500 towards the purchase of your new machine.
For equipment purchases over the $500,000 limit, there is a 50% bonus depreciation in the first year up to the $2 million limit. So if the purchase price is $650,000, you still get the first year $500k deduction, then you can take a bonus depreciation of 50% of the excess $150,000, plus the normal first year depreciation of $15,000. This adds up to an immediate first year deduction of $590,000 (500k +75k+ 15k) At the same 35% tax bracket this saves the business $206,500 immediately. It’s as if the $650,000 piece of equipment only costs $443,500.
All in all, leasing has always been an attractive option but this year’s special tax laws make it a home run for most businesses. You gotta love Uncle Sam!