For business owners, deciding between leasing or purchasing essential equipment is a pivotal choice. This decision not only affects your cash flow and tax obligations but also impacts your operational efficiency and long-term growth. Whether you run a small business or a growing enterprise, understanding the tax implications and financial trade-offs of leasing versus buying is crucial. This guide breaks down key factors to help you make an informed decision.
Key Factors to Consider When Leasing or Buying Equipment
1. Business Needs and Duration of Use
Long-term Needs: If your equipment will be used daily for years and is integral to operations, purchasing may be more economical. Owning allows you full control and long-term stability.
Short-term or Flexible Needs: For projects with fluctuating demands or rapidly evolving technology, leasing offers flexibility. Leasing reduces risks if equipment becomes obsolete quickly or if your business is experimenting with new products.
2. Cash Flow and Financing
Leasing Benefits: Leasing avoids large upfront payments, preserving cash for other business needs. Predictable monthly payments simplify budgeting and enhance financial flexibility.
Buying Benefits: Although buying requires significant initial capital, it can reduce long-term costs. If you secure affordable financing or have sufficient liquidity, ownership may save money in the long run. Ownership also protects against rising lease rates.
3. Maintenance, Repairs, and Control
Ownership: With ownership, maintenance, repairs, and insurance are your responsibility. However, you gain the freedom to customize or upgrade equipment as needed.
Leasing: Leasing often transfers maintenance obligations to the lessor, saving time and costs. However, customization options may be limited in basic lease agreements.
Tax Considerations: Leasing versus Buying
Understanding how equipment acquisitions are treated by the Canada Revenue Agency (CRA) can optimize your tax strategy.
Buying and Capital Cost Allowance (CCA)
Equipment purchases are capital expenses, allowing you to claim depreciation (CCA) over the asset’s useful life.
This depreciation reduces taxable income annually and spreads the financial impact over time.
Additionally, you may recoup some costs if the equipment retains resale value.
Leasing and Expense Deductions
Lease payments are typically considered operating expenses, fully deductible from taxable income.
In certain cases, you may treat leased equipment as a purchased asset, enabling CCA claims. This is applicable when the leased equipment exceeds $25,000 in fair market value, and both parties agree to the terms.
Historically, leasing has provided quicker write-offs than buying, as the lease term is typically shorter than the asset’s useful life, which saves you the time value of money. However, in recent years, the immediate and accelerated expensing of CCA has negated this benefit. The immediate expensing of CCA has now ended as of December 31, 2023 and the accelerated expensing is currently being phased out, however there were plans in the 2024 Fall Economic Statement to extend the accelerated expensing moving forward, but it has not been legislated as of the time of this article
Pro Tip: Always consult a tax professional to understand applicable deductions and credits based on your business structure and financial goals.
Analytical Questions to Guide Your Decision
What’s your cash flow situation? Can you afford an upfront purchase without straining operations?
Is the equipment critical to your business model? Long-term needs may justify a purchase, while seasonal or occasional needs favor leasing.
Can you manage maintenance responsibilities? Buying requires handling repairs, whereas leasing often includes maintenance.
How do tax incentives impact your choice? Evaluate tax deductions for lease payments and CCA benefits for purchases.
Hybrid Strategies for Flexibility and Savings
Blended Approach: Combine leasing and purchasing to maximize efficiency. For example, purchase critical, frequently used equipment and lease specialized or rarely used machinery.
Pre-Owned Equipment: Consider buying used equipment to reduce costs while still benefiting from CCA.
Conclusion
Choosing between leasing and buying equipment requires a careful evaluation of your business needs, cash flow, and tax implications. By considering factors like usage duration, financial flexibility, and CRA guidelines, you can make a decision that aligns with your growth strategy. A thoughtful approach—whether leasing, buying, or combining the two—ensures operational efficiency and optimal financial returns.
Take the time to evaluate your options, consult with your Virtus Group advisor, and strategize for both immediate needs and long-term success.
