As many businesses continue to hem and haw about investing in new equipment, your company may be able to win a competitive advantage by taking decisive action and acquiring new equipment. For many businesses, new equipment offers the potential for moving the company in a new direction, increasing efficiency or boosting production. However, deciding to invest in new equipment is only part of the equation. You also need to decide how to finance your equipment — with a lease vs. loan? Consider the following four factors when weighing your decision.
Loans may require a down payment, which can tie up capital that you prefer to use for other purposes. With a lease, on the other hand, you can finance 100 percent of the equipment cost, or even more, since installation, training and other related expenses can often be rolled into a lease. This means the equipment can already be generating revenue for your company as you start to pay for it.
Lease payments also tend to be lower than loan payments, further easing cash flow, because the lessor holds a residual position in the equipment. For example, say at the end of a five-year lease the equipment is worth 20 percent of its original value. With a lease, the cost is amortized down to 20 percent rather than down to zero, as it is with a loan. With a lease on the other hand, you can typically finance 100 percent.
If you purchase equipment with a loan, you may be able to take advantage of Section 179 of the IRS code, which allows you to fully deduct up to $500,000 of the cost of eligible equipment in the first year.* For example, if you're in the 25 percent tax bracket and you purchase $300,000 worth of equipment, the net cost to you could be just $225,000.
If the equipment isn't eligible for a Section 179 deduction, you may be able to depreciate 50 percent of the cost of equipment placed in service during 2016 and 2017. The bonus depreciation will phase down to 40 percent in 2018 and 30 percent in 2019.
If you lease equipment, you may find that you lose the tax benefits of depreciation deductions; however, your lease payments may be fully deductible. Also, a lease can be structured as a tax lease with tax savings passed on to you in the form of lower lease payments.
You may want to own equipment from which you expect to get many years of service; over the long term, doing so is sometimes less costly than leasing. But if the equipment must be upgraded every few years, owning it can turn into a disadvantage. It may be difficult to sell technologically obsolete equipment when you want to replace it. If you opt to lease instead, you can structure a lease so you upgrade to new equipment on your desired schedule.
Your need for the equipment
When you sign a lease, you're obligated to make payments for the entire lease period, even if you stop using the equipment before then. You may be able to include a couple of early buyout options in a lease allowing you to purchase the equipment during the term and sell it. If you finance equipment with a loan, you could sell the equipment and pay off the loan at any time during the term.
Consult with us
A business or commercial banking specialist at California Bank & Trust can help you evaluate your loan and lease options for business equipment and make a decision that fits your business needs. Talk to one of our knowledgeable bankers today. [cite::171::cite] [cite::172::cite]