Lease Versus Buy: Decisions

Lease versus Buy Decisions

In this paper, a determination will be made as to which option is more cost-effective. A consideration of intangibles such as the possibility that the product will become obsolete (if you are considering purchasing) or that your need for the product will expire before the lease does (if you are considering leasing), will be major factors in reaching a concise conclusion.

Leasing

Leasing equipment can be a better option for business owners who have limited capital or who need equipment that must be upgraded every few years, while purchasing equipment can be a better option for established businesses or for equipment that has a long usable life. Each business owner's situation is unique, however, and the decision to eliminate unwanted equipment at the lowest cost can be a major concern.

I. Advantages

* Socially

When considering leasing, from a social aspect, there is less stress and pressure concerning the possibility of selling the equipment. When the lease is up, the equipment is just merely turned back in. This alleviates major headaches reference proper disposal of the items.

* Economically

Leasing is a way of conserving cash. It saves on cash expenditures and helps the entrepreneur develop or increase his net worth and capital. http://partners.financenter.com/pncbank/learn/guides/smbizfinancing/sbleasevsbuy.fcs

* Property (land & structures)

Real estate leasing is a financing alternative to borrowing money or paying cash in order to finance the acquisition of office, warehousing, or retail space necessary for a business to run its operations. http://partners.financenter.com

* Vehicles

When leasing a vehicle, one does not have to be concerned about down payments and property taxes because you never really own it. When leasing a vehicle, you never fully absorb the cost of depreciation that also cuts down on the amount of money that is paid out for the service. http://www.investopedia.com/articles/pf/05/042105.asp

II. Disadvantages

* Socially

The company or person never can say that the piece of equipment is outright theirs. Therefore no sense of ownership exists. This leaves a perception of lacking fulfillment and achievement.

* Economically

The equipment or items cannot be claimed or filed as assets or capital investments. This makes the money spent for this action a liability and an account payable.

* Property (land & structures)

The disadvantage of leasing property is that ownership can change hands quickly. When leasing property, you are required to upkeep the property as an owner, but have no say to how the property can be utilized.

* Vehicles

Leasing vehicles mean that the item is a loaner. Leasing insurance is generally higher than owner insurance. Also there are stipends as to how much and how far the vehicle can be driven in a time period without incurring extra charges. http://www.investopedia.com/articles/pf/05/042105.asp

III. Tax advantages

Leasing conserves your working capital by requiring only a

minimum initial outlay of cash - usually just a Security Deposit and/or one

month's rental. Many times even the Security Deposit can be waived. This

financial flexibility frees your working capital for other profit generating

activities or investments. Leasing preserves your line of credit so that you

are ready should a business opportunity or unexpected demand for cash occur.

Experts agree that maintaining liquidity is vital to preserving a company's

health.

The key benefit of the Fair Market Lease (FMV) is that the

lessee has the option to return the equipment once the lease concludes,

without any further obligation. The other option, of course, is to purchase

the equipment for its fair market value, or continue to lease the equipment

from the lesser. Using a FMV lease, the equipment is not recorded as an

asset, nor does it become a long-term liability, and instead can be treated

as an off balance sheet operating expense. Thus, FMV lease payments are 100%

deductible.

When purchasing equipment either through cash, loan or with a

finance lease (one dollar option), cash expenses can be recovered by

claiming equipment depreciation according to IRS "useful life" rules. In

most cases, you can also claim interest portions as expenses as well. This

depreciation may last anywhere from five to seven years in this case. With a

Fair Market Lease, you can expense 100% of your equipment during the lease

term you select. As an example, a 36-month FMV equipment allows you to write

off the full expense of the item within three years, as opposed to its whole

value, which could take five years.

As of the 2003 calendar year, the program in I.R.S. Section 179

states that entering into a one dollar buyout option lease (Finance Lease)

may deduct up to a total of $100,000 from their calendar year 2003 income.

As well, your business need not spend $100,000 this year in order to claim

the amount, but instead enter into a lease agreement during this calendar

year. Leases smaller than 100,000, are eligible for tax deductions on a

dollar-for-dollar basis, providing annual deductions do not exceed your

total