Black Friday sale: Up to $1400 off bookkeeping, 100% tax-deductible.
However, there’s likely a right answer for your situation. Let’s take a look at the pros and cons of owning vs. leasing, as well as the impact these two different paths can have on your business.
Owning an asset: the benefits
Tax benefits
Making a big purchase for your business can qualify you for major tax deductions, thanks to Section 179 of the tax code. Currently, the spending cap for large purchases is $2,500,000.
While lease payments are also tax-deductible, owning a business asset opens the door for large tax deductions. For example, a business vehicle can qualify for up to a $25,000 deduction, while the tax savings from leasing a similar car would be far more modest.
Lower lifetime cost
Leasing is almost always more expensive than purchasing. When you own something, you do take on the risk that it will break and you need to repair or replace it. But maintenance costs are usually built into the cost of a lease—so you’re paying for it either way.
While owning might cost more up front, you’ll offset some of your long-term costs—especially if it’s an item you plan to use for a long time.
Leasing an asset: the benefits
Leasing also has two main perks: flexibility and lower maintenance costs.
Flexibility
Service businesses fail at a rate of about 19% per year. Overcoming the odds (we believe in you!) means being flexible and keeping costs low—and that’s where leasing comes in handy.
For example, say you own an ecommerce store and need warehouse storage space for your product. With a short-term lease, you can scale up to a larger facility if your business grows without having to buy (or sell off) an expensive storage facility. You stay flexible without having to invest in a major purchase like a building.
Another perk: in businesses where technology constantly changes, an asset might quickly grow outdated or unnecessary. That’s why being able to get out of a short-term lease for a technology upgrade makes you more flexible.
Lower maintenance
Many leasing agreements don’t require you to foot the cost of repairs (since you’re not the owner). Just as you’d expect a landlord to take care of a broken faucet, some leases include arrangements in which you can defer maintenance costs to the owners. That means lower risk of something breaking, and putting you out $1,000 for repairs.
If you’re spooked by the impact a broken piece of equipment could have on your business, look for a lease that includes a replacement while your leased item is being fixed.
Owning vs. leasing assets: some food for thought
We’re not done quite yet. The question of owning vs. leasing still depends on a few more factors, including:
- Your company’s cash flow
- The long-term value of the asset in question
- The pace of technology
- Upgrade needs and opportunities
Here are some other elements to mull over as you decide on which option is best for your business.
How long will you use the asset?
If you only need a business vehicle for two years, a two-year lease will suit you just fine. There’s no reason to take on the upfront costs associated with ownership. Plus: assets like vehicles lose as much as 10-15% of their value as soon as you drive them off the lot.
It’s also important to consider your growth potential. What do you want your business to look like five years from now? Will the asset still work well for you if your business has grown by 50%? 100%? More? If the answer is no, a short-term lease might be a better option.
Think big picture about not only what you need right now, but what you’ll need in the future, too.
Your cash flow
Cash flow is the lifeblood of your business.
So you have to ask yourself: What would adding a new lease do to that cash flow? What would buying something for your business do?
Just because an expensive piece of equipment is on sale, it doesn’t make it a smart financial decision. You wouldn’t spend your entire grocery budget on a bulk purchase of tomato soup to save a few pennies per can. It pays to do a little math and to have a healthy dose of common sense. Look at your cash flow before you make your decision.
Depreciation
Depreciation allows you to expense the value of big asset purchases over time.
Think of depreciation as the yardstick that measures an asset’s declining value. That decline is essentially an expense your company pays over time. For example: if you purchase a business vehicle and that vehicle declines in value, your business is the one incurring that cost.
Talk to your accountant and discuss whether or not a buying an asset will be beneficial to you when tax time rolls around.
Further reading: How to Calculate Small Business Depreciation
Resale
Does your asset depreciate quickly, the way a car drops 10% in value the moment you drive it off a lot? If you can purchase a business asset that has a history of holding on to its value, ownership has a leg up.
The pace of technology
Leasing a computer is more expensive than ownership, but it also means you’ll get to upgrade to the latest tech when the lease is up. If you’re a creative agency that likes using the latest MacBook, for example, leasing makes sense.
Owning vs. leasing: the final verdict
Still feeling iffy about whether you should own or lease? Turn to your gut instinct as you make a final decision. Be honest with yourself about need vs. want and what will be best for your business in the long run.
Sure, a new computer or a fancy piece of a equipment is exciting (and often shiny), but if it’s not entirely necessary, it’s always a safe bet to go with the option that’s most financially responsible.
Not 100% clear on how much your business can afford? A small business budget will help.
