The Benefits of Leasing over Buying

To lease or to buy, that is the question faced by businesses across the country. Here are a few things to consider when trying to decide if leasing is a better option than buying.

Tax Advantages: One of the most significant advantages to leasing over buying are the tax benefits. If structured correctly, lease payments, unlike loan payments, can be expensed in the period they are paid as a general operating cost. This results in a lower after-tax cost for the credit, which results in a lower tax liability when compared to depreciating the equipment cost and expensing the interest portion of the loan payments.

Expensing the full payment is also easier to account for on a company’s financial statements because only one general ledger entry is necessary to “book” the expense (instead of two entries necessary to account for loan payments).

Save Money: By leasing, a company can finance 100 percent of its equipment costs. Since a lease often does not require a down payment, security deposit or origination fee, a business can use capital or other credit means to invest in their company. Those investments often times can produce income that negates the cost of the lease. The same justification can be made for businesses that can afford a large cash outlay for equipment. That cash could be reinvested in another more profitable sector of the business negating the cost of the lease.

Makes Budgeting Easier: Leasing allows a company to acquire equipment immediately without a huge cash outlay. Also, if structured correctly, a lease provides a monthly expense that doesn’t change. If the equipment is owned, or the lease improperly structured, maintenance or repairs could punch a large hole in your budget.

Avoid Inflation: The terms of most leases are fixed. Therefore when the “real cost” of the lease is adjusted for inflation, a business can actually save money over time. The net cost of the lease will actually decrease while gross revenues increase. Leasing keeps equipment up to date and businesses competitive: A rule of thumb from businesses and financial advisors encourages businesses to match the productive life of an asset with the liability associated with that asset’s acquisition. By matching the lease terms to the life of the equipment, a company can match payment obligations to the productive, revenue-generating life of the asset. This is especially true with technology. It doesn’t make sense to make a huge cash outlay for equipment that may be obsolete a year later.

Leasing provides the kind of flexibility that buying can’t: Leasing allows a business to evolve and change with its industry, and it can provide short-term solutions that encourage long-term growth. By choosing to lease instead of buying, a business can avoid the initial outlay required for new equipment, and it won’t ever get stuck with outdated equipment. Leasing provides businesses, particularly small businesses, with options. It can provide a way forward for a business without limiting growth.

Contact us today. We can help guide you thru the options in a way that best fits your needs.

Always my best,

Bob

SMALL BUSINESS TAX CHANGES FOR 2014

Here are the small business payroll tax and other business tax changes in effect for 2014 that you need to know about. Included in this list are changes to the Social Security maximum, IRS standard mileage rates, and new additional Medicare taxes that affect self-employed individuals.

Also included are several expired tax provisions: the Work Opportunity Tax Credit, 50% bonus depreciation, and limits to Section 179 deductions.

1. IRS Standard Mileage Rate for 2014 – The IRS standard mileage rate has changed for 2014. Here are the rates:* 56 cents per mile for business miles driven, * 23.5 cents per mile driven for medical or moving purposes, * 14 cents per mile driven in service of charitable organizations.

These rates are in effect for the entire year for businesses taking the standard mileage deduction.

Businesses may decide to deduct mileage using either the standard mileage rate or actual expenses. If you drive less than 50% for business, you probably want to use the standard rate, but if you drive over 50% for business, adding actual expenses might be better.

2. Increased Social Security Maximum Tax in 2014 – The tax rate for Social Security remains the same but the maximum deduction has been increased for 2014, to $117,000. This maximum affects employees and it also affects small business owners who must pay self-employment tax.

If a business owner also has income from employment, employment income is considered first, then earnings from self-employment. Read more about how the Social Security maximum works for income from employment and self-employment. More »

3. Additional Medicare Taxes – Beginning with tax year 2013, an additional Medicare tax rate of 0.9% is applied to combined employment income and self-employment income above these levels:

* Married filing jointly – $250,000

* Married filing separately – $125,000

* Single – $200,000

* Head of household (with qualifying person) – $200,000

* Qualifying widow(er) with dependent child – $200,000

This additional tax must be withheld from employee pay above $200,000. For self-employed business owners, this additional Medicare tax is included in self-employment tax calculations.

In addition, also beginning with the 2013 tax year, a net investment income tax of 3.8% on investment income is imposed on higher income individuals, including business owners.

4. Bonus Depreciation Expiring for 2014 – For 2013, businesses were able to deduct up to half the cost of new equipment through a special bonus depreciation deduction, with the rest of the cost depreciated over the useful life of the equipment. Bonus depreciation won’t be available for the year 2014, except for long production period property and noncommercial aircraft.This tax provision was reduced for 2014 by Congress, which may decide to restore previous levels.

5. Section 179 Deduction Limit Cut to $25,000 – Businesses can expense the entire cost of equipment in the year of purchase under Section 179, rather than spreading out the cost over multiple years using regular depreciation. For 2014, businesses can expense up to $25,000 (down from $500,000 in 2013).

Qualified leasehold improvements, qualified restaurant and retail improvements can be depreciated over 15 years if the asset is placed in service during 2013. For 2014, these assets will be depreciated over 39 years.

6. Work Opportunity Tax Credit Not Available – The legislation authorizing the work opportunity tax credit expired at the end of 2013. This legislation allowed employers a tax credit for hiring workers in specific categories, including veterans, food stamp recipients, and workers in certain targeted areas.