As an IT partner for many machinery and equipment dealerships across the country, we often receive questions regarding the industry. One common question we encounter is whether it makes more sense to lease or purchase hardware outright.
This is an excellent question, and today, we will answer it as best we can. However, the answer is a bit complicated, to say the least.
Let us begin with complete transparency by saying that we are not Certified Public Accounts (CPAs) and, therefore, are not qualified to talk about the tax implications of this decision.
We highly recommend running these decisions past your tax professional to make more informed decisions based on your situation.
That being said, let’s dive right in.
Leasing vs. Purchasing Hardware
Leasing means getting an outside financial company (like our financial partner GreatAmerica) to pay for the invoice amount of your upgrade project and then making monthly payments to them until the term of the lease is fulfilled.
Two types of leases can be purchased in repayment periods of 12, 24, 36, and 48-months.
- $1 out lease means that the hardware can be purchased from the leasing company for a dollar when the lease term is complete.
- Fair Market Value (FMV) lease is the other option and has a lower monthly payment. At the end of the FMV lease, the client has the option of paying market value (decided by the leasing company) or, packing up the hardware and sending it back to the leasing company.
We always recommend the Fair Market Value option because of the flexibility it gives.
On the other hand, purchasing hardware means paying the full invoice amount out-of-pocket and gaining full ownership of the hardware. You bear the depreciation costs and can sell the hardware at market value (decided by the market) anytime you like.
Let’s discuss the pros and cons of leasing hardware to give you a deeper understanding of leasing vs. purchasing.
Pros and Cons of Leasing Hardware
The main pros of leasing are that it can be easier to expense a lease payment than to depreciate equipment and it can significantly help with cash flow. For example, if a network replacement project costs $11,000 with labor, your monthly lease payment for a 48-month term will be around just $275 per month.
This is a significantly lower initial price to pay for the immediate benefits of the hardware. You save $9,350 of cash flow after the first six months. The con of leasing can also be found in the mentioned numbers.
Using simple math, you can multiply the monthly payment ($275) by the number of payments (48-months) you will see that the $11,000 upgrade project will cost you $13,200.
This is where your qualified tax professional comes in. There are cases where the extra cost ($2,200) of leasing gets in tax savings.
The other con comes from the risk of committing future earnings. It is not always easy to know from year to year what your future income will look like. One problem with leasing and debt, in general, is that a fixed expense is in place, which makes it harder to adjust to market pressure in the future.
Conclusion
Hopefully, you now have a better understanding of the difference between leasing and purchasing hardware. As mentioned, it is always better to run these things by your tax professional to understand the tax savings you can get for leasing.
If you can get enough savings to lower your long-term leasing costs, for example, $1,000 on $13,200, we suggest paying a little extra for leasing, because it is worth the cash flow your business can retain. Again, this depends on the financial state and individual needs of your dealership.
If you have questions that are not addressed here, please reach out today.
We might not know the exact answer, but we will give you our honest opinion and help connect you with the right people.
