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Lease or buy manufacturing equipment

Should You Buy or Lease Manufacturing Equipment?

Posted by Kevin Harris, CPA on Oct 22, 2018 8:00:00 AM

Pros and Cons to Help You Decide

Every manufacturer strives to achieve the most cost-efficient operations, and equipment weighs heavily in the equation. So, does it make more sense to lease or buy machinery and tools? You guessed it—it all depends.

One key factor is the value of available tax deductions. It would help if you also determined how long you need the equipment. For example, do you plan to upgrade every few years? This helpful equipment buy vs. lease calculator guide can help you compare amounts and determine what is best for your company.

Here are some considerations to help you crunch the numbers.

Leasing

Leasing business equipment can help you preserve capital and have more options, but it can also cost you more in the long run.

Pros

  • Lease payments are often tax-deductible as an operational expense, reducing the cost of your lease.
  • With predictable payments, you can budget accordingly and stretch funds further.
  • You can usually expand your equipment options since up-front cost is not a factor.
  • The leasing company generally handles repairs due to normal wear and tear so that you can avoid these additional costs.
  • You can get a feel for the equipment before fully committing.
  • You can avoid obsolescence and upgrade to high-tech equipment more quickly
  • While the numbers may indicate that you will pay more in the long run, when you consider all of the variables involved (repairs if owned), this may not be true. 

Cons 

  • When you no longer need the equipment, you won’t have equity, and therefore no return on the investment.
  • Sometimes the length of the lease may surpass your needs.
  • You may experience hassles or delays with the leasing company when you need repairs.
  • Limited product selection or availability is more limited than what’s offered on the open market.
  • Lease payments create a drag on earnings, which could negatively impact operating success metrics, e.g., earnings before interest taxes and depreciation (EBITDA). 

Buying 

Ownership can provide valuable tax breaks and be more cost-effective, but you have to make a large investment. 

Pros 

  • Tax incentives under Section 179 and bonus depreciation of the IRS Tax Code are greater for purchasing, but there are changes to the deductions under the Tax Cuts and Jobs Act. However, if the equipment fails to qualify under the code, you may be able to apply a depreciation deduction.
  • If you plan to have the equipment for a long time, it probably is more cost-effective to buy. In other words, if you are considering keeping a car for more than 100,000 miles, why lease it?
  • You may be able to find a financing option that uses the purchased equipment as collateral to attain a low-interest 

Cons 

  • You may find yourself settling for a lower-cost option than you would when leasing, given the large lump sum.
  • If the equipment breaks, you won’t be able to return it; pay attention to the warranty to see what it covers and for what length of time.
  • You’ll have a large expense on your line of credit, which may limit funding options for other necessary expenses. 

You will also need to consider the revenue generated by the equipment you lease or buy. What is its useful shelf life and what are the other costs associated with its use? Moreover, just as with a car, it may be possible to negotiate a purchase option for the equipment. For example, you could credit the lease payment towards the purchase price. 

New Lease Accounting Standard

No discussion about leasing equipment is complete without mention of the new lease accounting rules that will become effective for private companies in 2020. Known as ASC 842, the new standard will significantly change the way in which lessees and lessors account for leases. The purpose and intent of this pronouncement is to increase transparency and comparability among organizations and improve financial reporting. 

The new standard will require businesses to recognize lease assets and lease liabilities (whether financing or operating leases) on the balance sheet, and to disclose key information about leasing arrangements.

Do you have questions about buying versus leasing equipment, or the new leasing accounting standard? For more information, please contact Kevin Harris, CPA, at 214-365-2473, or use the contact form below. Learn more about the Manufacturing and Distribution Services Group at Goldin Peiser & Peiser.

Note: This content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article.

Topics: Manufacturing