For many small businesses, their main issue is acquiring enough capital to grow and run their operations. The good news is that this may easily be solved by leasing capital equipment.
Purchasing more inventory or meeting tight payroll deadlines can put a real strain on your cash reserve especially if you are a start-up. Tying up your cash reserve in capital equipment makes you asset rich but cash poor. Without sufficient cash flow, it’s hard to respond to the ever changing market conditions or even take advantage of upcoming opportunities. Let’s find out what the benefits of leasing capital equipment are.
Benefits Of Leasing Capital Equipment
1. You Can Easily Avoid The Technology Trap
Technology advances very fast especially for computer and technology related equipment. Leasing this type of capital equipment is beneficial because it allows you to upgrade your systems after every few years. In addition, computer assets depreciate with time so it would be a good idea to lease it.
2. 100% Financing
Most equipment leases cover the cost of maintenance and installation. This will save you thousands and possibly millions of dollars. Moreover, many equipment leasing companies do not require their clients to make any down payments which is a plus.
3. Easier Funding
Obtaining a loan from a bank is not easy for many small businesses and start-ups. This is because they require you to provide years of credit and banking. Leasing capital equipment is much easier and more convenient. You don’t need to provide a business plan and in most instances, you can lease with damaged credit or a 6 months credit history.
4. Tax Savings
You can deduct your lease monthly expenses in a single year. When you purchase equipment on a loan on the other hand, it will depreciate over several years. You will also benefit from Section 179 of the IRS tax code. The current deduction limit is $500, 000 and the limit on capital purchases is $2, 000, 000. This means that if you purchase equipment worth more than $2million, you won’t benefit as much from Section 179. You should however talk to your financial advisor to determine how much you can save on taxes.
5. Expense Item
A loan is considered a debt while a lease is considered as an expense. Leasing capital equipment can improve the net worth and financials of your business.
What Is The Difference Between Depreciating And Expensing?
In a nutshell, long term equipment is depreciated while short term equipment is expensed. For example:
1. Depreciation Of Equipment
Through the process of depreciation, long term assets can be deductible. Depreciation is described as a non-cash expense that reduces the worth of a piece of equipment over time. Equipment can depreciate because of two reasons; obsolescence and wear and tear. For tax purposes, this equipment is known as capital expenses.
2. Operating Expenses
Every business incurs these expenses and they include subscriptions, rent, lease payments, postage, supplies, utilities, etc. These expenses are important because they reduce the amount of income taxable; therefore, they are deductible. In order for expenses to be deductible, they must be:
- Reasonable in amount. You can’t deduct expenses such as entertainment and food.
- Related to your business operations
- Spent during the current tax year
- Necessary and ordinary to the business operations
How Is Depreciation Calculated?
Depreciation of capital equipment is calculated by using the original cost of the equipment, subtract the salvage value of the equipment and divide it by the years of its useful life.
Many business owners avoid using depreciation because they think it is complicated but if used correctly, you can save a lot of money on taxes.
Final Word
Given all the benefits of leasing capital equipment, it makes sense to consider it for your business. To determine if leasing is right for you, ask yourself these questions:
- Do you need to use the equipment or to own it?
- What are your immediate and future goals?
- Is it much cheaper to lease the equipment than to purchase it?
It is best to talk to your accountant so that they can review your business plan and help you make the right decision for your business.
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