Should You Lease or Buy Your Computers?

The Economic Stimulus Act provides an incentive to buy your equipment sooner rather than later
Stephen Webster

With the economy on the rocks, many companies are wondering if they should lease (or finance) their computers, telephone switches, and office equipment rather than buy them. This year, the decision is a bit more complicated: The Economic Stimulus Act, best known for its $600 rebate checks, holds some powerful tax incentives to get small businesses to purchase new equipment. If you're clever, you might be able to get the tax break on a leasing deal as well. But you don't have much time left to take advantage of it.

Leasing relatively high-ticket items such as computers has always been a way to fix costs and spread them over a longer time. A survey last year by the Equipment Leasing & Finance Foundation found that 59% of computer equipment and 32% of software used by businesses is leased or financed. Leasing lets you maintain cash flow and preserve capital and credit lines in a dicey economy.

In addition to eliminating up-front costs and allowing you to pay a predictable monthly fee, leasing usually lets you bundle any extras you might need—installation, software, maintenance, and even training for your employees—into the lease. It also can protect you from technological obsolescence, because the leasing company is stuck with what could be outdated technology at the end of the contract. If you had leased that pbx system instead of buying it a couple of years back, you'd be able to swap it for a cost-saving voice-over-ip model when the lease was up.

The downside of leasing is that it's almost always more expensive than buying. Say you want to replace 10 desktop computers with new Dell laptops and docking stations at $2,000 each. You can pay Dell $20,000 now, or pay $703 a month for the next three years, or $25,308. That's assuming you have a good credit rating and return the gear at the end of the lease.

The most obvious advantage of buying equipment is that you own it forever. (Some leases will let you buy the equipment for a fixed price or "fair market value" when the term is up.) But there are also special tax savings for purchased, but not leased, equipment. Congress sweetened those so-called Section 179 deductions considerably in its economic stimulus package, but only for equipment bought and installed by the end of the year and only up to the amount of taxable income your business does this year. For this year only, the law doubles the amount you can write off as an expense, to $250,000, instead of having to depreciate the purchase over several years. Nearly all tangible property used by your company qualifies, including computers, software, office equipment, and even furniture. If you go over $250,000, the package includes a temporary depreciation bonus that lets you write off up to 50% of the purchase in the first year, on top of the normal depreciation allowance.

I'm no tax expert (you should have a chat with yours), but deductions of this size certainly get my attention. If you need to upgrade your technology this year but don't have the cash to do it, try negotiating with your leasing company or technology vendor. Leases can be structured so that you, instead of the vendor, hold title to the equipment and therefore get the tax break. And many finance companies, such as IBM Global Finance, are offering lower monthly payments on new leases, passing along some of the benefits they receive under the new law.

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