In our last entry, we examined the pros and cons of leasing commercial equipment, and now we turn our attention to the practice of buying said equipment. For many, there is still something to be said for actually purchasing and owning the equipment that your company uses, but is it always the preferred course?
Buying Commercial Equipment (Pros)
The single most obvious advantage of buying commercial business equipment is that you own it, which may be good for those units that have a long and productive life span, or which are not likely to become outdated in the near future. This would include items such as office furniture or farming equipment.
Tax incentives are another benefit, with the ability to deduct the cost of some of your newly purchased assets in the past year or so. In 2013, you can deduct up to $500,000 of equipment, subject to a phase out if you placed more than $2,000,000 worth of equipment into service in any one year.
There is also the possibility of a deduction for depreciation, although not all equipment purchases qualify. There are tax savings for almost any business equipment through depreciation. Some of the assets that would not qualify are real estate, inventory bought for resale, and property bought from relatives.
Buying Commercial Equipment (Cons)
There is usually a higher initial expense involved with purchasing commercial equipment, not to mention a down payment amount of around 20% on a good day. Borrowing money also ties up lines of credit, and lenders may place restrictions on future financial transactions in order to make sure that you can repay your loan.
You also have the possibility of getting stuck with old and outdated equipment that you can no longer use or sell. You may also have to reinvest in new equipment before the terms of your loan are up. There are a lot of commercial equipment pieces that have very little in the way of resale value; computers costing $5000 today will be worth less than $1000 in as little as three years.
If you remain torn between buying or leasing the equipment that you need, try to figure out the approximate net cost of that asset, factoring in tax breaks and resale value. Once you determine which option is more cost effective, look at other intangibles such as the possibility of the product becoming obsolete or if the need for that product will expire before your loan/lease term does.
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