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Lease vs purchase

Discussion in 'Business Operations' started by Bassman, Nov 30, 2002.

  1. Bassman

    Bassman LawnSite Senior Member
    Messages: 270

    I am in the market for a new mower. Have not talked to my accountant yet but my question is... What are the tax implications of a lease arrangement versus outright purchase? IE: Equipment cost is $8200.00. My understanding is by leasing for 24 months with a $1.00 buyout I pay no sales tax and can write off 100% of equipment cost as business expense. With a purchase, I go the depreciation method. However, what is the formula for depreciation? Which method will have the most favorable tax advantage? Thanks.
    P.S. The finance charge to the leasing company is app. $2.000.00 or app. $83.00/mo. I would be paying $10, 200.00, (w/no sales tax, 100% write off), vs $8200.00 plus $574.00 s.t =$8774.00 outright purchase,(how many yrs. and how much depreciation write off)?
  2. Nebraska

    Nebraska LawnSite Senior Member
    Messages: 525

    Depending upon your tax situation you can write off up to the entire amount (minus sales tax) in the year you purchase it under section 179 (in Tax year 2003 you can write off up to 25,000 in tax year 2002 it is 24,000).
  3. GroundKprs

    GroundKprs LawnSite Bronze Member
    Messages: 1,969

    Right, use sec 179 to it's fullest, if you have the means to pay cash for new equipment. That way, your expense is recovered in taxes the same year you pay it out.

    And a lease is a rental, and most states charge sales tax on rentals, so you'd actually be paying sales tax on the purchase price plus the finance charge. May be different in your state.

    Leasing equipment is usually more beneficial to larger businesses, that would quickly max out sec 179 deduction. Also lease depends on your cash flow: would paying cash strap you, even just a little? I hate to pay finance charges, but they are just a cost of doing business.

    Different story leasing a vehicle. Fed tax regs can often require over ten years to depreciate average truck, even if you pay cash. Leasing for a low buyout figure allows you to deduct most of your lease payment (except for exclusion allowance and % personal use) as a direct expense each year of the lease.
  4. Bassman

    Bassman LawnSite Senior Member
    Messages: 270

    Thanks Nebraska & GroundKprs. It sounds like I would do fine with the purchase option. However, the large cash outlay at point of sale would put me below what I like to keep in reserve, especially this time of year. The lease appears to be a viable alternative.
  5. landscaper3

    landscaper3 LawnSite Bronze Member
    Messages: 1,354

    Telmark lease co. www.telmark.com
    We leas 3 Walkers, 2 Toro ZMasters, 2 dump trucks, 2 pickups and a few sanders. We use to purchase and at tax time our accountant did the depreciation value then found Telmark and we are saving thousands$$$$$$$ over the old way! plus you can miss 3 months a year if times are tough and its 100% tax deductable.
  6. Nebraska

    Nebraska LawnSite Senior Member
    Messages: 525


    Then finance the equipment.. A lot are giving no payments no interest till March, April, even May....
  7. bubble boy

    bubble boy LawnSite Bronze Member
    Messages: 1,020

    some people lease, then turnover at the end in order to keep equipment fresh...often firms with employees who beat equipment.

    just a thought.
  8. beck

    beck LawnSite Senior Member
    Messages: 453

  9. Rupslawn

    Rupslawn LawnSite Member
    Messages: 12

    I have been following the posts on truck leasing. However, I have not seen any posts that address selling the truck just before the lease is up. Ford dealer here said that doctors and lawyers lease their cars and then sell it; usually for more than the residual value of the car. They pocket the difference if they get more than the lease residual price; otherwise, they just turn it in and walk away. Has anyone done this? Is the lease residual usually (??) less than what you would sell it for, say after the 3 or 4 year lease is up? How is that determined?

    May have an impact on which way to finance my next truck. Looking at a 2003 Isuzu NPR with Rugby landscaper dump bed with behind the cab storage box.

    Just another day in paradise.

    Mahalo plenty!
  10. GroundKprs

    GroundKprs LawnSite Bronze Member
    Messages: 1,969

    Advantage of a lease is that you can expense almost the full lease payment (less a small amount, per IRS regs) each year. If you purchase, and pay off in 4-5 years, you can only depreciate less than half of what you paid out (in past, at least), then continue depreciation or take capital loss if you sell it. All has to do with your cash flow.

    Example: a friend leased a $25K truck for business; they gave him a $4K residual at end of 5 year lease. So in those 5 years, he claimed most of the $21K (actually 25-28K with interest) as expense on taxes. If he was depreciating, could only have taken about $9K (guestimate) plus interset paid, and would have paid out an extra $5K in fed inc tx. Of course, he would have recovered this in the future, claiming depreciation (considering that he kept the truck) when he had no payments.

    The residual is just a guess at the value of the vehicle at end of lease. Will almost always be lower than real value, so it is usually better to buy it, then resell at market value if you want a new one. Drs and lawyers don't want any hassle over $2-5K at end of lease, but that money counts to me. LOL.

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