Originally Published in 1996 (20 years ago)
© Peter A. Wiesner, 2016 Many people wonder whether it is better to lease or buy assets? The determination of which method is more beneficial is often difficult. Therefore, by reviewing the following issues and comparing the differences of the two alternatives then a improved decision of whether to lease or buy should result.Advantages of LeasingMany people in today's economy are primarily focused on the monthly cash flow issue. The lowest monthly lease payment is generally perceived to be better than buying the assets. This short term monthly cash flow focus may in many situations be at the expense of better tax planning and buying certain assets that really make sense to buy. However, leasing should allow for lower monthly payments in the short term and this could be advantageous in some situations. Another major reason for leasing an asset is that the consumer may not want to keep the asset at the end of the lease term. This is very common with computer equipment because the technology is changing rapidly. Consequently, the consumer at the end of the lease, in these situations, tends to buy a new system rather than upgrade the old one. With a lease the consumer saves the expenses of advertising and repairs/upgrades in order to bring the assets into saleable condition. Therefore, any asset that is subject to rapid technology changes and that can be leased were the lease is structured with a unguaranteed residual value should favor a lease structure as the recommended choice. Extra reasons for leasing can be the lower financing costs (interest rate), vendor purchase discounts offered to the lease company for bulk buying, and sometimes the income tax implications. Leases that are financed by the vendor may contain lower finance charges as an incentive to promote more sales. This type of vendor finacning is usually less than other sources in the market place. If a lease company is involved they may also be able to purchase the assets cheaper than the retail purchaser. If these bulk purchasing savings are passed onto you then the lease alternative can be cheaper because of the discounts. Finally, the tax write-offs of a lease tend to be higher in the first and last year (over a four year lease term) as compared to buying. Please contact your accountant to double check the lease write-offs which are then compared to the capital cost and interest expense deduction. This comparison will then determine the final tax route to take. Advantages to Buying Assets The purchase of an asset causes the short term cash resources to be converted to long term assets. Therefore, if one has surplus cash in the bank and no short term need for those funds (currently earning 4% interest) then it may be wise to purchase the needed assets rather than leasing them. This will be beneficial because the lease interest rate maybe at 7-9% as compared to the bank rate of say 3%, and the difference of the higher lease interest expense will then be avoided by making the purchase.
Secondly, the purchaser maybe able to purchase used products. These used products still tend to be more difficult to lease. The depreciated price for the used assets tend to be more favourable to the consumer as compared to acquiring new assets. Therefore, many consumers lease new assets because of convenience rather than for prudent business decisions. Consequently, if the financing decision can be separated from the buying decision a improved overall decision should result.
Purchasing assets will avoid the built in lease surcharges for excessive usage. For example, a car lease will allow only a certain amount of kilometres or usage of the vehicle in a given time frame. Once the usage in a specific time period or term is exceeded then additional charges will apply to you from the lease company. This issue can be entirely avoided if the assets are purchased rather than leased. For those that use the assets very heavily in the earlier years it may be of benefit if they purchase the asset in order to avoid the time/usage surcharges found in most leases.Better Planning Means More After Tax Money In Your Pocket!! The pro's and con's of the lease or buy decision need to be reviewed before entering into either one. Please consult with me or your Chartered Accountant to determine which tax and cash flow treatments are more beneficial to your situation. The tax write-offs will be optimized into the years of higher taxable income given the flexibility and differences in tax treatments of the two alternatives. This tax strategy review could reveal significant tax rate differences and potential tax savings to the taxpayer depending on the time of year and method ultimately selected. The extra time and effort involved in the planning stage may save hundreds of dollars. Unfortunately, these tax saving are underutilised by many taxpayers. This low cost tax planning should be taken advantage of in today's competitive economy and this strategy should keep more after tax money in your pocket!.