Buying Vs. Leasing a Computer

The decision of whether to lease or buy your computer may not be as complicated as you think. The two primary deciding factors are:

• Do I have enough cash to purchase the computer now?
• What are the tax consequences of leasing versus buying?

Do I Have Enough Cash?

If you can afford to pay cash for your computer, it's probably a good idea. Leasing companies are currently charging small businesses about 17% interest on computer leases. On a three-year lease, a $2,000 computer will cost you 36 payments of $71.31/month or a total of $2,567.12 . That works out to be $567.12 in interest (although this is tax deductible). On the other hand, $71 a month is far preferable to continuing with your manual system.

What Are the Tax Consequences?

If you choose to buy your computer, the entire amount will most likely be deductible in the year of purchase. Under IRS Code section 179, $17,500 of equipment purchases will be fully tax deductible. The section 179 deduction is allowed to the extent that there is zero profit after its use (e.g., it cannot be used to create a tax loss). If you lease, tell the leasing company that you want the lease set up as an "Operating Lease". With an Operating Lease, the payments are fully deductible. This will keep things simple for you and may reduce your accountant's fees. Also, remember that if the computer is used for personal as well as business use, the deduction is reduced by the percentage of personal use.

Some Additional Notes on Financing

Service businesses planning to keep the computer after the lease term should enter only into "Closed-End" leases. In a Closed End lease, the buyout amount at the end of the lease is known up front. In an Open-End lease, you will have to negotiate with the leasing company if you wish to keep the computer. Either lease will give you the option to buy or return your computer at the end of the lease period.

Also, avoid using a credit card to finance any business purchases, unless the card is used solely for business purchases. You may find yourself butting heads with the IRS over what is business interest (deductible), and what is personal interest (non-deductible). The IRS has a very large and hard head about these matters.