Wondering whether leasing or buying equipment is better for your business?
The decision to lease or buy technology and other equipment is best made on a case-by-case basis, as every business is unique. Many factors play into your decision and it can be stressful deciding which is best for your particular business. Let’s take a look at the pros and the cons of leasing vs buying equipment for your business.
Pros of Leasing Equipment
Easier to Upgrade
Although many businesses choose to pay cash up-front for technology-based equipment, it doesn’t actually make the most sense since tech equipment usually needs to be updated regularly to remain competitive. Leasing allows you the option to remain flexible with your technology options, and assuming you are not locked into a long term leasing contract, you have the option of regularly assessing your technology needs and making adjustments.
Less to Lose
Depending on how it’s used, your investment can be lost in a day. Really. It happened to a client of ours, a creative videographer. He purchased a brand new drone for $3,500 on his VISA. The next day, he took the expensive drone out into nature to give it a whirl. The drone had a button to press for it to fly back to where it was launched. The photographer pushed the button, the drone hit a tree on the way back, and promptly fell right into a river. Sad client called us to say he was considering immediately purchasing another $3,500 drone on his VISA. We explained the benefits of leasing tech-related equipment for creative businesses like his own.
The Canadian Revenue Agency (CRA) allows you to claim computer and other equipment leasing costs as deductions on your taxes, which will reduce your tax bill. Different technology purchases qualify for different types of deductions. You can claim a deduction on any technological device or service that you use for your company. If you use your work device (smartphone) for personal reasons, however, you can only write off part of the expense. To figure out the percentage you can deduct, count the number of hours per day that you use the device for work, which is 33% for a typical eight hour workday.
Is it a current expense or as a capital expenditure? Current expenses are costs you pay for immediate use, like a Smartphone, the internet or an App. The CRA allows you to deduct the full cost in the year of purchase. Capital expenditures are purchases that you use in your business for more than one year, including computers, copy machines, and cameras. Remember that this is assuming you have not leased them or have a capital lease. For these purchases, the CRA requires you to capitalise the cost and deduct a portion of it each year that you use the item. A car, for example, is an operational lease for a short amount of time, even though the expected life is 10+ years, so there is a residual value at the end of the lease which makes it an operating lease. Capital lease is leasing the entire life of the equipment. Your business accountant can let you know whether your technology lease/purchase qualifies as a current expense or a capital expenditure.
Cons of Leasing Equipment
Higher Overall Cost
What’s your time value of money? Is it worth more down the road, than spending it now?
Another client, a sign shop owner, was going to buy a cutter machine for $40,000. He decided to check in with us to discuss his options. We told him that you can pay for the machine outright or invest that money and use the interest from that to pay lease payments on the same cutter machine, which will earn you more money and subsidise the lease.
With leasing, you can’t sell the equipment once you are finished with it, since you don’t own it. You can’t build equity in the equipment, so there is no potential to make any money back. In the end, our sign shop owning client decided to lease the machine and invest the money. He decided that the positives of leasing outweigh the negatives, especially for technological equipment.
If you want to upgrade equipment, like our creative videographer client, it always makes sense to lease, especially when the rate of improvement is so incredibly fast. Even though the cost of leasing may be higher overall, why would you buy the equipment if you know it won’t be up-to-date in a few years?
As for cars, If it’s going to break down on you, you may lose a day’s pay! What happens if your jalopy doesn’t start one morning and you miss a meeting with a potential client? By leasing you won’t have to worry about your car breaking down. And, if cash flow is a concern, then leasing a car will typically mean lower monthly payments compared to financing a car under the same terms.
Pros of Buying Equipment
You Own the Equipment
If the equipment has a long useful life, and is not likely to become technologically outdated in the near future, it makes sense to purchase it and hold on to the value. Maintenance is also in your hands, so you can make sure any issues are fixed immediately. If you own a piece of equipment and your company has a downturn, you have an asset to sell if you need to generate cash in the short term. For example, if you have an older camera, you could sell it, lease a newer one and get some cash out of it. It goes from an asset on the balance sheet to an expense.
Tax Depreciation Deductions
While, you can’t claim the full amount of a large equipment purchase in the tax year it occurs, you can claim a percentage of the purchase cost each year over the expected life of the item, a Capital Cost Allowance. According to the Canada Revenue Agency (CRA), it’s “a tax deduction that Canadian tax laws allow a business to claim for the loss in value of capital assets due to wear and tear or obsolescence.” There is no depreciation deduction if you lease, as you’re just renting.
Cons of Buying Equipment
Already Outdated Equipment?!?
For technology that becomes outdated quickly, you are going to be stuck with it because you own it. You will eventually have to decide if it is wise to keep using it, repair it, store it or sell it. Determining the true costs for equipment should include considerations of tax deductions and/or the potential resale value. What is the potential revenue derived from using this equipment? How quickly will the equipment become outdated? What’s the size of the equipment and the overall costs? Each decision regarding equipment leasing or buying should be made carefully to best fit your company’s situation and needs.
Lower Overall Costs
If your priority is to spend less on equipment in the long run, buying it is definitely your best option. Buying a machine converts that cash to an asset on your balance sheet, which can be a good decision if your company has a robust savings account and is looking to add to their assets. To capitalize an asset, you put it on your balance sheet instead of “expensing” it. If you spend $1,000 on a piece of equipment, rather than report a $1,000 expense right away, you list the equipment on the balance sheet as an asset worth $1,000. Then, as time goes on, you amortize (depreciate) the asset over its useful life, taking a depreciation expense each year and reducing the balance-sheet value of the asset by the amount of the expense. This process allows your company to spread the cost of the asset over its useful life and avoid drastic impacts to the income statement in the period the asset was purchased.
Which Option Is Best for You?
Hopefully these pros and cons of leasing vs buying equipment will help you determine which method is the best fit. A creative using technology that becomes antiquated within a few years might prefer short term rentals whereas a company with a healthy cash flow, using equipment that stands the test of time, may prefer buying. It all depends on your company’s distinct situation.
For other tax related articles, see CRA: Business Tax Payments Explained and Do I Have to Charge GST/HST?