Q&A: Buying Assets

Question: I own a small business outside of Chicago and I was wondering if leasing or buying assets for my business is better from a tax perspective.

Lou, Palatine, IL

Answer: Lou, there are certain situations in which leasing makes sense over buying and here are some general rules and guidelines for you:

With a short-term lease (often three years or less for most business property), you get a faster write off using a lease than depreciating property over the 5 or 7 year useful life cycles.

With a lease you do not need to worry about resale value (especially if equipment is becoming obsolete, such as the computer industry and the rapid changes with technology).

If your company only needs the equipment for a short period of time, leasing makes sense, as you would not need to worry about reselling the equipment if you bought it.

It is more cost effective to lease in that you can typically put down a small % of the asset’s value rather than having to use up valuable capital to make an asset purchase.

The lease transaction may not need to appear on your balance sheet such that your financial ratios will appear better if your business is in the market for financing.

There are, of course, some advantages to buying and actually owning an asset. For instance:

You can elect to expense, under Section 179, up to $250,000 of equipment purchases in 2010. This applies when the equipment is placed into service and not when it is actually paid for.

The low current interest rates (relative to recent history) makes buying very favorable right now.

You can take advantage of any appreciation in an asset with a purchase that is not available for a lease.

The decision whether to lease or own can be quite complicated and hopefully these general guidelines will assist in the decision-making process.