Inevitably, at some point, your business will need new computers, networking hardware, and other IT equipment. When that time comes, business owners must decide whether to buy or lease tech equipment for the company. What should you do?
Start by making a list of the specific equipment that you need. Add up the costs for buying the tech equipment. Determine whether the purchase will affect cash flow in way that might be detrimental to your business. If cash flow is a concern, consider leasing tech equipment instead of purchasing it outright.
When does it make sense to lease tech equipment?
Leasing IT equipment is especially attractive to a business trying to keep expenses low in the near future. There may be a small activation fee depending on the lease agreement, but the cost of entry is negligible compared to a business loan that usually requires a 20 percent down payment. The new equipment comes immediately, and the company can get right to work with new technology.
If having the most up to date hardware is a high priority, consider leasing IT equipment. Leased equipment is replaced with new hardware whenever the terms are renewed. A company that signs a standard 3-year term will always have current-generation hardware. It passes down the cost of obsolesce to the leasing company.
Understand the lease terms to calculate total costs
Just like any financing agreement, the terms of an equipment lease are negotiable. Make sure to understand all the costs associated with your particular lease. Certain lease agreements require lessors to maintain the equipment which may add to the total cost of leasing. Having a clear picture of total costs helps decide whether to buy or lease IT equipment.
Know the tax incentives for each scenario
Both scenarios have tax accounting advantages. Lease payments can usually be deducted as business expenses. If you buy equipment, you can write off the total cost for the year it was purchased under Section 179 of the IRS code. Certain equipment is eligible for a depreciation deduction in the years following. Check with a tax professional to get a better picture of how your specific purchases will affect your taxes.
When might buying tech equipment make more sense?
Product ownership is the key advantage. The long-run total cost of equipment ownership will probably be lower when the entire term is considered. Procuring equipment is also easier without having to tend to the leasing process.
Assume that all technology eventually becomes obsolete
When a company purchases tech equipment it assumes the risk of the equipment becoming obsolete, thus requiring reinvestment in current technology. The resale value of obsolete technology is often nil. Additionally, if for whatever reason the company stops using the equipment, it is stuck with the purchase.
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So, should you buy or should you lease? The answer depends on the specific equipment needs of the company, and whether buying that equipment makes sense with the company’s finances. The best thing to do is to know exactly what you intend to purchase, how long you plan to use it, and have a clear idea of how costs compare over the terms of the lease. The better a company understands the costs, the easier the decision whether to buy or lease tech equipment becomes.