Getting to the bottom line
With Dannible & McKee, LLP
by Brian W. Johnson CPA, CFE, CCIFP
One of the age-old dilemmas a company faces is whether it makes more sense to lease construction equipment or to purchase it outright. The answer depends on your individual circumstances, as both directions have distinct advantages and disadvantages. In the end, how those factors line up in your case are what will ultimately drive the decision for you.
The pros of buying
• Allows you to maintain more control of the asset: You own it, controlling how and when the equipment is used, sold or traded.
• Low interest rates can make financing attractive. Cash purchases eliminate service fees, finance charges and interest expenses.
• The more versatile the machine and the more jobs it works, the more it might make sense to buy.
• Name-brand equipment will have higher resale values. Expectations are that they would pay back more of their upfront costs at time of later sale or trade-in.
• Depreciation, insurance, repairs, taxes and interest are deductible. Generally speaking, it can optionally be fully expensed for income tax purposes, depending on circumstances.
The cons of buying
Buying often requires large down payments and higher monthly payments that reduce working capital and can have a significant impact on cash flow. Do those funds have better uses, such as paying salaries, covering business development expenses or paying on existing loans to which the company is already committed?
You’re responsible for providing or contracting for storage, transportation, maintenance and service. Keeping equipment in good repair and well maintained is a must if you desire to maintain trade-in value.
Equipment can become obsolete and less efficient while you own it. While you may not have to make any monthly payments as you own the equipment, your machines will eventually be out of date and monthly payments will transform into maintenance and repair expenses.
The pros of leasing
When you lease equipment, your turnover schedule is more known and tied to the terms of the agreement. This simplifies planning for the timing of replacement, such that you aren’t surprised by sudden breakdowns and unexpected costs of maintenance and repair. Generally, comprehensive maintenance programs are available as well.
Often arrangements can be structured to allow for skipped payments during slow months.
Many larger equipment manufacturers self-finance their leasing arrangements, offering more attractive interest rate and/or down payment terms than can be found in traditional bank loan borrowings.
Payments for operating leases, which require the return of the equipment at lease’s end, can be tax deductible as business expenses. (Capital leases, which come with purchase options, are subject to depreciation rules.)
Leasing can actually be less expensive than buying. Generally, when leasing with the intent to return at the term’s end, you are only “purchasing” a portion of the useful life of the asset. As a result, your payment costs are less than buying or financing the same equipment through a traditional loan. If you want to keep current with the latest equipment models and don’t mind never actually “owning” the equipment, you will most often always spend less by leasing.
The cons of leasing
Leases are generally non-cancelable obligations. Once you’re in, you’re in, which can be a problem if for some reason you find you don’t need the machine anymore.
You could be responsible for damage fees upon turn-in.
Becoming familiar with implementation of the new accounting standards which impact the accounting for leasing which go into effect over the next few years may be challenging for smaller companies. Software is still under development as the implementation date is a current subject of discussion.
When deciding whether to lease or buy a fixed asset, there are a multitude of factors to consider, including tax implications. Dannible & McKee, LLP has worked with numerous clients to help them solve the financial puzzle when it comes to leasing vs. buying. We can help you determine the approach that best suits your circumstances.
Contact firstname.lastname@example.org with any questions you might have regarding this issue. Brian W. Johnson, CPA, CFE, CCIFP, is an audit partner with over 30 combined years of experience providing audit and accounting services to both private and publicly-held domestic and foreign companies. You may contact Dannible & McKee, LLP at 315.472.9127 or visit the firm online at dmcpas.com .