We are often asked whether it is better to lease or purchase business equipment.
There were changes to the depreciation threshold for 2014 which may affect your decision.
To discuss this in more detail, let's look at the following example:
A client recently asked, "I am considering a three-year lease of equipment for $300,000 versus a purchase of the asset due to the reduced Section 179 depreciation ($25,000) threshold in 2014. What do you advise?"
Whether a lease payment is deductible as rent expense or capitalized as an acquisition cost depends on the facts and circumstances. The answer usually depends on whether the burdens and benefits of ownership have passed to the purported purchaser. If the lease qualifies as a Capital Lease, the IRS generally makes you capitalize the equipment and treat the lease payments as a loan. If the lease qualifies as an Operating Lease, they allow you to deduct the payments as they are made. While an Operating Lease may be a potential way to write off a larger portion of the equipment due to the reduced 2014 Section 179 limit ($25,000), you will need to make sure the lease does not qualify as a Capital Lease. A Capital lease is a lease which, at its inception, meets one or more of the following criteria:
- By the end of the lease, ownership is transferred to the lessee.
- The lease contains a bargain purchase option.
- The lease term equals 75% or more of the estimated useful life of the lease property.
- The present value of the lease payments is 90% or more of the FMV of the lease property.
Most leases we see are Capital leases because of Item #1 or #2 above. This means that the lease will have to be capitalized as if it was a purchase, but verify this is the case with your leasing company.
Also, while not a guarantee, most tax analysts feel the Section 179 will be retroactively increased to $500,000 and that 50% Bonus Depreciation may be continued as well. However, they also feel that nothing will happen until November 2014 at the earliest on this. If Section 179 and/or Bonus Depreciation is reinstated, you would be able to write off more than just your actual cash payments made during 2014.
We will continue to keep you updated as we hear on any tax law changes regarding fast depreciation.
If you have any questions about this topic or need assistance, please request a complimentary accounting consultation or contact us at (616) 642-9467.
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