Renting equipment remains a double-edged sword

By Randy Bonnecaze

At some point, you're going to need a new truck, a better computer system or more up-to-date equipment. Although the decision to acquire one or more of these items is generally easy to make, you may be tempted to defray some of the costs by leasing an asset instead of buying it. This isn't necessarily a bad idea, but it is one that calls for careful consideration.

It's less hassle. Leasing has many advantages. The main one is gaining use of an asset for less money than you would need to buy it. But there are others as well, including:

1. Easier credit terms. Finding someone who will lease equipment to you is usually less troublesome than locating someone willing to extend the credit needed to buy the item. Also, you may be able to negotiate a longer period and more flexible payment schedule with a lease than a loan.

2. Fewer financial restrictions. An equipment lease rarely includes provisions limiting future financial operations. Loans commonly come with restrictions on acquiring more equipment or borrowing additional funds without the lender's permission.

3. Greater ability to shop around. If you are uncertain about a piece of equipment's usefulness, leasing it on a short-term basis allows you to evaluate the item without committing too many resources. You can also use short-term leases to test and compare different brands and models.

4. More convenient maintenance. Many lessors retain responsibility for maintaining and repairing the equipment in question. Thus, you can avoid finding qualified repair service providers and decrease your downtime when repairs are necessary.

But downsides exist. The biggest disadvantage of a lease is that an asset's cost, over its life, often exceeds the purchase price. This is because rental payments must compensate the lessor for acquisition and financing expenses, as well as for its retained risk of continued ownership. Worse yet, as lessee you lose the accelerated depreciation-related tax deductions that come with ownership.

Also, leasing does not establish equity in the equipment. At the end of the lease term, you have no tangible asset to show for the expenditure. One solution to this is to negotiate a purchase option, under which some of your lease payments go toward the purchase price and create equity.

Last, once you sign a lease agreement, you commit to making payments for the entire stated period. If you stop using the asset, you may incur large fees.

Purchasing retains power. So is leasing really worth it? There's an easy way to answer this question. With your financial advisor's help, set up a projected cash flow statement showing the benefits of the item in question and the respective costs of both leasing and purchasing. Then perform a net present value analysis of your cash flow under both options and compare the results.

If you decide to buy instead of lease, keep a few things in mind. Negotiate equipment purchases carefully - know what you want and what you'll pay before you start shopping. In addition, don't overlook the second-hand market for used equipment. You may be able to buy the same asset for a fraction of the cost.

Finally, as mentioned, remember the tax benefits of buying. You can save the most by electing to expense a portion of the item's cost in the year of acquisition per annual IRS limitations and expense the remainder through annual depreciation deductions. Consider financing the purchase as well - the interest payments are deductible on your federal tax return.

Editor's Note: Randy J. Bonnecaze is a Certified Public Accountant (CPA) with Hannis T. Bourgeois LLP, Baton Rouge.