Buy or lease equipment? Here’s what you need to know.
When it comes to capital purchases to operate your business, the perennial question for business owners is whether to buy or lease equipment.
As accountants and bookkeepers, we prefer to see our clients make decisions that preserve their hard-earned capital while at the same time maximizing the efficiency of operations. While leasing equipment can be more costly overall, there are many scenarios when a short-term lease is preferred over an outright purchase. For example, if you utilize equipment that becomes obsolete quickly, such as a computer, printer, or other electronic devices, a lease makes sense. In the same manner, specialty vehicles that are not driven miles or are only used occasionally on the job, such as a bucket truck, would make sense to lease over purchase outright. On the other hand, leasing a van or pick-up that will rack up many miles in a short time may not be practical to lease. Nonetheless, a growing business that is strapped for cash might find leasing its fleet is the only practical way to equip its road team quickly with reliable vehicles. Especially when one considers the current shortage (and price upcharges) for new vehicles.
From a tax perspective, both leasing and purchasing have advantages. Leases can be expensed as a cost of doing business, while equipment ownership must be depreciated on a scheduled basis over several years. You should discuss your purchase plans with your accountant prior to any major purchase to be certain you have all of the fine details that may impact your decision.
Section 179 Deduction
Regardless of if you purchase or finance, the IRS provides (at least for now) an opportunity to recover your investment quickly. According to the IRS, Section 179 provides qualifying equipment including “tangible personal property such as machinery and equipment purchased for use in a trade or business, and if the taxpayer elects, qualified real property” can be completely written off in the first year of operation. Without the 179 deductions, equipment would need to be written down on a schedule over several years. Congress designed the deduction with the express intent of stimulating the economy by encouraging business owners to purchase large manufactured items and thereby create jobs.
There are a few rules to consider if you are interested in the Section 179 deduction when considering your equipment purchases.
In 2017, Congress passed the Tax Cuts and Jobs Act, (or TCJA) and raised the Section 179 deduction amounts for tax years after 2017, the deduction was raised from $500,000 to $1 million. More recently, however, the 100% deduction for purchases made in 2021 and 2022 will start to decrease each year until it hits 20% in 2025.
Most common items are vehicles, computers, software, as well as tools and machinery, and even office furniture. While real estate purchases are not subject to the 179 deduction, improvements may qualify. Improvements to nonresidential real property, such as roofs; heating, ventilation, and air-conditioning property; fire protection and alarm systems; and security systems qualify for this deduction.
One additional note: If you are considering leasing, a capital lease (where the equipment is purchased at the end of the lease) may qualify under Section 179 rules. Unfortunately, an operating lease does not qualify for the Section 179 deduction. Check with your accounting professional before you sign your lease to be certain.