Leasing vs. Purchasing Hardware
When it comes time to replace hardware, a common question that we get is whether it makes more sense to lease or purchase hardware outright. It’s a great question but the answer can be complicated.
Let’s start out by saying that we are not Certified Public Accounts (CPAs) and are not qualified to talk about the tax implications on this decision. It’s always a good idea to run these decisions past your tax professional.
Leasing is when an outside financial company (GreatAmerica is the company that we partner with) pays the invoice amount for an upgrade project and then collects monthly payments until the term of the lease is fulfilled. There are two types of leases that can each be purchased in repayment periods (12, 24, 26 and 48 months). $1 out leases mean that the hardware can be purchased from the leasing company for $1 when the lease terms out. Fair Market Value (FMV) is the other option and has a slightly higher monthly payment. At the end of the FMV lease, the client has the option of paying market value (decided upon by leasing company), or boxing up the hardware and sending it back to leasing company. We always recommend the $1 out option because of the flexibility it gives.
Pros and Cons of Leasing Hardware
The pro of leasing is that it can be easier to expense a lease payment than to depreciate equipment. It can also significantly help with cash flow. For example, if a server replacement project is $11,000 with labor, the monthly lease payment for a 48-month term will be around $275 per month.
The con of leasing can also be found in the numbers above. If you multiply the monthly payment ($275) x the number of payments (48 months) you’ll see that the $11,000 project now costs $13,200. This is where the qualified tax professional comes in. There are some cases where the extra cost of leasing might be made up in tax savings. The other downside comes from the risk of committing future earnings. It’s hard to know from year to year what your income will look like. One problem with leasing (debt in general) is that a fixed expense is now in place, which can make it harder to adjust to market pressure in the future.
If you have questions that are not addressed here, please reach out. We might not know the exact answer, but we’ll give you our honest opinion and help to connect you with people that can help.