Leasing vs Buying Business Equipment

Buying vs leasing equipment: Tax implications for business owners

When it comes to acquiring equipment for your business, deciding whether to buy or lease can significantly impact your financials and tax situation. Both options have distinct pros and cons, especially when it comes to the impact on your tax filings. Our newest blog post will look at the key tax considerations business owners should keep in mind when deciding between buying and leasing.

The benefits of buying

1. Depreciation Deductions
   When you purchase equipment, you can depreciate its cost over its useful life. Depreciation allows you to spread out the expense of the equipment over several years, reducing your taxable income annually. The IRS provides specific guidelines on the depreciation methods and useful life of different types of equipment. Additionally, the Modified Accelerated Cost Recovery System (MACRS) allows businesses to take larger depreciation deductions in the earlier years of the asset’s life cycle.

2. Section 179 and bonus depreciation
   Under Section 179 of the IRS tax code, businesses can immediately expense the full cost of qualifying equipment in the year of purchase, rather than depreciating it over time. For the tax year 2024, the maximum deduction is $1.16 million, with a phase-out threshold of $2.89 million. This can be a substantial benefit for businesses looking to reduce their tax liability quickly.

   Additionally, bonus depreciation allows an additional first-year depreciation deduction on qualifying property. For 2024, businesses can deduct 80% of the cost of eligible new and used property. This deduction can be taken even if the business also claims the Section 179 expense.

3. Interest deductions
   If you finance the purchase of equipment, the interest paid on the loan is deductible as a business expense. This can further reduce your taxable income, making buying equipment a more attractive option.

4. Long-term asset ownership
   Purchasing equipment means your business owns the asset outright. Over time, as the equipment is fully depreciated, it still has value and can be sold or used indefinitely without ongoing lease payments. This can be beneficial for businesses with a longer-term horizon and stable equipment needs.

The lowdown on leasing

1. Lease payments as business expenses
   Lease payments are typically considered operating expenses and can be fully deducted in the year they are paid. This can provide a consistent annual deduction, simplifying budgeting and tax planning. Unlike depreciation, which may offer larger deductions in the earlier years, leasing provides a steady expense deduction throughout the lease term.
2. Avoiding depreciation recapture
   When you sell a piece of depreciated equipment, the IRS requires you to recapture the depreciation and pay taxes on it, potentially increasing your tax liability. Leasing avoids this issue entirely, as you don’t own the asset and therefore aren’t subject to depreciation recapture.
3. Lower initial costs
   Leasing often requires a lower initial outlay compared to purchasing. This can free up capital for other business needs and investments. From a tax perspective, the lower upfront cost means you won’t need to immediately expend a large amount of capital, which can be beneficial for businesses looking to maintain liquidity.
4. Flexibility and upgrading
   Leasing can provide more flexibility, especially in industries where technology and equipment rapidly evolve. Leasing allows you to upgrade to newer models more easily, ensuring your business remains competitive. This can also translate into tax savings if newer equipment results in higher efficiency and lower operating costs.

Key comparisons

When deciding between buying and leasing, consider the following:

1. Cash flow and budgeting
   Buying equipment can require a significant upfront investment, while leasing spreads out the cost over time. Consider your business’s cash flow and budgetary constraints when making this decision.
2. long-term vs. short-term needs
   If you need equipment for the long term and anticipate using it beyond its useful life, buying might be more cost-effective. For short-term needs or rapidly changing technology, leasing could be more advantageous.

3. Tax strategy
   Work with our tax experts to determine which option aligns best with your strategy. You’ll need to consider your current and future tax liabilities, potential deductions, and overall financial goals.

4. Maintenance and ownership costs
   Ownership comes with maintenance responsibilities and costs. Leasing might include maintenance in the lease agreement, reducing expenses for on your business.

Equip yourself for success

The decision to buy or lease equipment is a little more complicated than meets the eye, with significant tax implications to consider. Both options offer unique benefits that can impact your business’s financial health and tax liability. By understanding these tax implications and working with experts like our tax specialists, you can make an informed decision that maximizes your financial advantages and supports your long-term business strategy and financial goals.