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Buying vs. leasing business equipment: What works for you?

Buying vs. leasing business equipment: What works for you?

Traditionally, it's been easier for many businesses to lease rather than purchase new equipment since it costs less up front and can help you stay up-to-date with the latest technology. However, since Congress permanently set the Section 179 deduction limit at $500,000 in December 2015, small and mid-size businesses may qualify for a hefty tax break for buying equipment. This may make purchasing more attractive than leasing, at least in some cases.

Get the tax break in the 1st year

Under Section 179, you may be able to deduct up to $500,000 of the cost of qualifying capital equipment in the year it is placed in service rather than depreciating it over a number of years. Many years ago, the Section 179 deduction was much more limited, with a cap of $25,000. But in the 2000s, Congress repeatedly raised the limit — but only for a limited time. Each time they increased the limit, it had to be reauthorized the next year to prevent the cap from dropping to its old $25,000 limit. That reauthorization typically took place near the end of each year, too late for many businesses to make purchase decisions based on it.

Now that the $500,000 limit has been made permanent, you can count on it when deciding whether to purchase or lease equipment. In addition to the tax break, using a Section 179 deduction can simplify your tax accounting on capital purchases since — if your equipment costs are less than $500,000 — you don’t need to figure depreciation over a number of years.

In addition to the Section 179 deduction, you may be able to take advantage of bonus depreciation, at least for the next few years. You can depreciate 50 percent of the cost of equipment acquired and put in service during 2016 and 2017. Then bonus depreciation will phase down to 40 percent in 2018 and 30 percent in 2019.

Example of tax savings

Check this hypothetical example, which assumes a 35 percent tax rate and equipment purchases that exceed the $500,000 Section 179 limit:

Equipment purchases$600,000
Section 179 deduction$500,000
Bonus depreciation
(50% of ($600,000 – $500,000))
$50,000
Normal first-year depreciation
(20% in each of 5 years on remaining amount)
$10,000
Total first-year deduction
($500,000 + $50,000 + $10,000)
$560,000
Cash savings
($560,000 x 35% tax rate)
$196,000
After-tax equipment cost$404,000

Leasing remains a good option

Leasing business equipment can make acquiring equipment more affordable, since it minimizes your initial expenditure. It rarely involves a down payment, in contrast to a purchase, which may require a down payment of up to 20 percent.

Also, for equipment that becomes obsolete quickly, leasing offers a distinct advantage. You can choose a term that allows you to lease new, updated equipment on a schedule that meets your needs. You won’t be stuck with old, outdated equipment that has little resale value.

Help weighing options

Can’t decide? An experienced California Bank & Trust business banker can help you decide whether a Business Access Term Loan or a Commercial Equipment Lease is a better option for your situation.

 
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The information contained herein may not represent the views and opinions of California Bank & Trust, a division of ZB, N.A. or its affiliates. It is presented for general informational purposes only and does not constitute tax, legal or business advice.
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