As a small business owner, you may have to decide between leasing or buying an asset. Oftentimes, this decision rests largely on the financial cost comparison between each option. However, there are many other things to consider as well, and each alternative has its own benefits and drawbacks. We’ve put together a quick guide to help with making the decision to lease or buy, be it equipment, vehicles or something else.
Consideration | Lease | Buy |
Ultimate ownership | No | Yes |
Capital outlay | Low; monthly payments only | High; upfront payment or financing arrangement required |
Tax deductions | Deduct the full lease payments in the year they are made, whether operating or capital lease | Slower deduction of the full capital cost over multiple years |
Warranty | Entire lease period is likely fully covered under warranty | Warranty period can end during ownership |
Responsibility of disposing the asset | No responsibility, other than returning it to the lessor in acceptable condition | Responsible for the future disposal of the asset |
Affordability | Ability to use an upgraded version of an asset that would otherwise not be affordable to purchase; premium paid in the long run, if you continually lease | Ability to negotiate a lower purchase price when paying upfront or buying multiple items; may be able to negotiate package deal |
Depreciation of the asset | Considered in the lease cost; simpler accounting | Must account separately on the financial statements |
Usage restrictions | Limited usage (e.g., kilometres-driven allowed for vehicles); heavy penalties for overages | No limitations on usage |
Long term usage | Right to use the asset ends with the lease, unless the asset is purchased afterwards | Payments eventually end, and you still have the benefit of using the asset for the remainder of its useful life |
Financing options | May come with low (or 0%) financing options | Some vendors offer lower cash purchase prices, or negotiated rates |
Insurance costs | Comparable to ownership | Comparable to lease |
Residual value | Higher residual values at the end of the lease term may require higher buy-out prices if you choose to purchase the asset afterwards | Assets with longer useful lives command higher upfront purchase prices |
Nature of business | Freedom from tied up capital overhead and maintenance of an aging asset | Freedom to use the asset as you wish and modify according to your business needs |
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Small business owners often find themselves at the crossroads of a lease vs. buy decision. This quick guide is a starting point for some of the considerations to be made, and you shouldn’t hesitate to discuss the options with your CPA to fully consider all the information and make the best decision for your business.
At Arria CPA, we work with our clients to prepare an objective analysis of their leasing and buying options, taking into account not only their finances, but also the anticipated growth of their business, and relevant industry trends. Contact us for a free, no-obligation consultation to learn more about how we can help your business make the right decision.
Disclaimer: Please note that this is only a brief summary and is based on current accounting regulations and tax law interpretations. Accounting regulations and tax laws are subject to continual review and change, so should the facts provided to us be inaccurate or incomplete, or should the law or its interpretation change, our summary may be inappropriate for your uses. This article is written for educational purposes only, and as such, we recommend you consult a professional before making an accounting or tax decision. If you have any concerns, or would like further consultation regarding this matter, please contact us.
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