There are many factors that determine whether or not a business should lease or buy its equipment. One of the most important factors business owners should keep in mind is taxes. The tax consequences of buying a truck are different from that of leasing.
When it comes to leasing, there are generally two types: operating lease and capital lease. The type of leasing the business chooses to go with will determine how it will show in their balance sheets, and therefore, show in their tax implications.
Operating Lease
When a business owner uses an asset on an operating lease, the business assumes no risk or benefit beyond use of the asset under the agreed terms and conditions. At the end of the lease, the business owner must return the asset to the original owner. On the balance sheet, the owner’s lease is deducted as an expense.
Capital Lease
A capital lease, like an operating lease, provides business owners with the right to use the asset, but in addition they also adopt some of the risks and benefits with use of the asset. One of the benefits is that they have the option to purchase at the end of the lease (at a discounted rate). When writing their balance sheets, business owners can include the lease as an asset. The interest payments on the lease can be deducted annually.
Lease or Buy?
When you buy a vehicle, for example, you assume all the benefits as well as the risks of owning that asset. If you bought the vehicle with a loan from the bank, the interest payments will add up, and this can eat into your profits. If you are prepared to purchase with cash, this can be a viable option, but there will be an opportunity cost with regards to other potential uses of the money you purchase the vehicle with. However, getting a loan from the same company you’re leasing the vehicle from will often lead to lower interest and an investment that leaves you with less to pay off at the end of your lease.
On the other hand, with leasing you pay based on the expected worth of the vehicle at the end of the lease period. Also with leasing you can enjoy the new technological features of each vehicle every time you lease it. You also won’t have to worry about selling the vehicle or trading it.
When a business is operating with limited resources, it is better to lease a vehicle or any other asset that is crucial to the operations of the business. They can potentially save on taxes and not have to be burdened with responsibilities of owning a vehicle. For more information, contact our team today!
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