Published February 8, 2012

Buying vs. Leasing – The Choice Isn’t Always Clear

Buying vs. Leasing – The Choice Isn’t Always Clear


Trying to determine whether you should buy or lease can be complicated. There are many tax, financial, and practical issues to consider. The decision also depends in part on the type of asset, so consider two prime concerns for business owners: office space and equipment. 


Surveying your space. For many companies, there comes a time when owners must decide whether to renew a lease, move to a different location, or buy new (or pre-existing) space.


Purchasing office space is clearly a big step, but owning your own building can give you flexibility and tax advantages a lease cannot offer. For instance, you have more control over how to configure and use the space, you can sublet some if you choose, and you can maintain it as you wish. You will also benefit from mortgage interest and depreciation deductions at tax time.


Naturally there are risks to ownership. For one, you will not be able to easily pick up and move, and you will need to decide how the owners will share the cost of buying and maintaining the building. Keep in mind that the building need not be owned in the same proportion as the business itself.


There are other matters to consider as well. You will need to assign responsibility for arranging and overseeing activities such as exterior maintenance, cleaning, and paying related expenses. In addition, if you decide to sublet some of your space, you will need to wear an additional hat – that of a landlord. 


Leasing business space has its downsides, too. Perhaps  as a lessee, you have dealt with an unresponsive landlord or property management company. One may also have less freedom to change or rearrange space – not to mention ever-increasing rent and loss of mortgage interest and depreciation tax deductions. However, if you decide to move, it is usually easier to leave a rented office than to sell one you own. 


Ultimately, it is a question of net present values. Will the present value of the capital appreciation you ultimately gain when the property is sold be greater than the current cash flow advantage you would likely have under a lease?


Considering your equipment. The buy vs. lease question also comes into play with equipment. Depending on the type of work you do, it may not be quite as big of a decision, yet it is still important.

 

Leasing equipment does offer some tax advantages. Leasing generally allows you to deduct monthly payments from your taxable income, while you may have to depreciate the cost of equipment you bought (if you do not qualify for the initial write-off under the Section 179 expensing election).


Leasing also may be the better option if you have a lot of technologically advanced equipment that will probably become obsolete in a few years. Under a lease, you can simply return the equipment when the term is up. If, however, the equipment is likely to still be serviceable for several years after it is paid off, buying may be more cost-effective. 


Also, consider your company’s future plans. If you are planning to expand, go paperless, merge with another business, or make any significant changes that will affect the equipment you require, factor those plans into your decision-making process.


Weighing the pros and cons. When it comes to the buy vs. lease conundrum, there are not many clear answers. We would be happy to assist you in weighing the pros and cons of any purchase-or-lease decisions you are facing. Details and a keen eye for the future matter in making the right choice.


If you would like to discuss the impact of this information on your business, please contact the expert listed below at PYA, (800) 270-9629.

Recommended Links:

Learn more about PYA’s Business & Individual Tax Services

 

Learn more about Realty Trust Group

 

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