As a business owner, you occasionally find yourself facing the need to add major assets to your operation. That may be a fleet of vehicles, heavy equipment, or updating your IT system for the entire office. These purchases come with the option to lease or buy, both of which have financial implications for your business. It’s also not always obvious if you should lease or buy an asset, but a CPA in Colchester, VT, can help you make the right decision. Here’s a look at how leasing versus buying impacts your bottom line.
Leasing Vs. Buying: Is One Better Than the Other?
There is no yes or no answer to this question, so much as it’s a matter of what makes the most sense at the time. Leasing is viewed as a short-term possession of an asset, whereas buying is the act of purchasing the asset for outright ownership over the long term. Both options align with your needs and goals for using the asset in your business, and they also have benefits in the form of tax deductions. Ultimately, you want to get the most out of the asset and have the least impact on your finances.
Financing the asset is part of the decision-making process for its acquisition. This is where you make the decision to lease or buy, but it’s not always an easy question to answer. Consulting with the best CPA firms in Burlington, VT, can give you more insight and help you make the right decision.
When You Should Lease an Asset
Leasing is attractive due to the fact the payments are lower than they would be if you bought. This frees up more cash flow while enabling you to enjoy the benefits the asset brings. The payments are also tax-deductible in the same way as if you had bought the asset. On the surface, these are great reasons for leasing an asset instead of buying since the benefits are similar.
However, leasing an asset means it eventually has to be turned back to the lessor. If you decide to extend the lease, the total cost often winds up being more than its purchase price. The best scenario for leasing an asset is to look at it as a short-term situation. That is, you plan to use the asset for a set number of years and for a total amount that’s less than buying. You get the benefits of using the asset, tax deductions, and a lower payment over the lease period, but none of the hassles of ownership.
When Buying Makes Sense
Buying an asset has long been considered to be better than leasing due to the fact you control the asset outright, and you can depreciate its value on your taxes. However, the payments are higher, and you have to sell the asset once you’re finished with it instead of turning it back. If you finance the asset, you’ll be making payments for a longer period of time than you would have if you leased.
These reasons make it sound like leasing is better than buying, but buying makes sense if you plan to hold the asset for a long period of time. Another advantage comes in the form of Section 179 of the IRS tax code which enables a business owner to take an immediate deduction in the first year of ownership, provided the purchase qualifies. You receive the benefit of the deduction in one year as opposed to the years-long depreciation process.
Gain More Insight Into How Leasing or Buying Impacts Your Business Finances
Tax laws at the state and federal levels are always changing, and it can be difficult to keep up with how they affect leasing or buying an asset. At Clear Accounting, we stay on top of these changes to give you expert assistance and help you make the right choice. Call us today to learn more about our services and how we can help you make the most of your finances.
