Is Leasing Really Worth It?

llamaluvr asks: "As I understand it, there are some financial benefits for businesses leasing hardware equipment. Does anybody know what exactly those are, and how much they really help? Do they really outweigh the additional costs of replacing, repackaging, and returning old hardware? How do the size of the business and the computing environment affect these benefits? Additionally, what is the best balance between leasing and purchasing equipment -- would leasing desktops and laptops, but purchasing monitors be best, or should one just lease everything?" "A little bit of background: I work in the IT Operations department for a BU of a Fortune 100 company, and we lease practically everything right now. We have 4 full-time employees for about 800 workstations, and, while we seem to have enough manpower for managing projects and tickets, we have a tough time getting to returning the equipment, so a lot of it is already late. Complicating this is that many of these PCs are in a harsh industrial environment, and often have at least one failing part, which then costs us a fraction of the entire workstation (for example: a busted floppy might cost us $150 or more, unless we test the PC and replace the part, of course). Corporate has been more attentive to this drain on our time and money lately, and they have talked of outsourcing this process, but in the meantime, we're stuck with it. BTW, we lease IBM equipment through ePlus."

Comments

it's all in the taxes

[arete]

Basically, it's because the tax law depreciates most of that hardware over something like 7 years. So in the first year you'll get to write off something like 20% of the value.

With a lease you expense 100% of the amount you pay as soon as you pay it.

This is why a very common option is lease-to-buy with a very cheap buy option at the end of some number of years. This is essentially an apparently legal scam to allow you to write it all off. (It's legal because the leasor really does still own it until the end)

The next-best option is to sell the hardware the day you stop using it, because then you immediately get to write off the difference between the amount you've already devalued it and the amount you actually got for it. Because computers aren't worth anything much sooner than 7 years, you always get a tax benefit when you sell a computer that just became obsolete.

Re:it's all in the taxes

[arete]

I decided I should clarify this. The important bit, which I just sortof assumed, is: money now is a lot better than money later, especially because as a corp you probably borrowed money from somewhere, so you're paying interest on anything you have to spend now. This is what "Return on Investment (ROI)" is all about - to spend more money on something it has to be worth substantially more in the long term, not just a little more.

(The rest of this is all massively, massively approximated. I am also not an accountant.)

Say you have an originally $1000 3 year old computer that's 60% depreciated If you keep it, you'll eventually get to write the other $400 (40%) off - over the next 4 years. This might save you $200 in taxes over those 4 years.

If you sell it for $2 you get to write off the rest of it immediately - so you immediately get $398 of writeoff and $2 - or $201 you've made, and it's all right now. This equation only gets better if you get more than $2 at the end.

This tax part basically hugely exaggerates or perhaps magnifies the "money now" part of a lease, especially if you can't guarantee that you'll immediately dispose of it.

So a lease for $400/yr for three years might be $200 after tax each year, while buying it is more like $850 the first year and then it gives you some money back each additional year.

Advantages of leasing

[dancornell]

I am not an accountant, but I am a small business owner so I have some idea about this stuff.

The advantages of leasing are primarily:

1. cash flow benefits
2. tax benefits

One of the primary things that small businesses (well, all businesses, but especially small businesses) have to manage is their cash on hand and their cash flow (when cash shows up, when it leaves) If I have to buy a $3000 server and I pay cash then I need to have $3000 cash right now and that cash goes away. If I lease that server, then I might have monthly payments of $50/month. Over the life of using the equipment I pay more, but at the outset I don't have to have all of that cash around.

Also, when you pay money to buy something of value, for tax purposes you don't take all of that cost off your profit immediately (you pay taxes on profits, not gross income) You have to depreciate it out over a period of time which is supposed to represent the useful life of the equipment. This means that while you might have paid the money out (in cash) you can't claim that they money has all gone away yet for tax purposes. Not fun!

When you lease an item the leasing company owns that capital expenditure and so they depreciate the item. Your monthly payments can be treated as expenses so they come off your taxable profits immediately. Plus you don't have to account for the depreciation, etc.

In my business most of my costs are salaries for my people, not workstations for them to use so workstation costs are a small fraction of my expenses. It makes sense just to buy a decent workstation outright rather than haggle with the lease people and try to return or buy out the eqipment later on. Other businesses will operate differently.

My $.02

Re:Leasing servers

[Rei]

Also: If the poster is in an environment where things tend to break often, leasing is probably not for them. The whole point of leasing is that the item being leased gets use beyond what you would put it through, thus extracting enough extra value from it such that it proves cheaper for your company and still provides enough extra profit to the leasing company to justify their expenses. If the item tends to break on your watch, you might as well just purchase.

In general, leasing of anything is optimal if:
A) The item has a long usable lifespan (i.e., damage from use is minimal) and low maintenance costs compared to purchase costs
B) The lessee only needs it for a short time
C) Item devaluation is minimal

Does this really describe your business model here?

Re:Leasing servers

[strider5]

One other thing to consider:

leasing is a straight-forward writeoff for tax purposes while buying will involve amortizing the cost over multiple tax years.

Re:Leasing servers

[Lord Dimwit Flathead]

At the time of the lease's inception, if it meets any of the the following criteria, it is classified as a capital lease, and thus the payments are a capital expenditure that must be amortized over the useful life of the underlying asset:

1. the lease term is greater than 75% of the property's estimated economic life
2. the lease contains an option to purchase the property for less than fair market value
3. ownership of the property is transferred to the lessee at the end of the lease term
4. the present value of the lease payments exceeds 90% of the fair market value of the property

If none of these conditions are met, the lease is an operating lease, which means that the payments are expensed when they are made.

If the company exercises a purchase option at the end of an operating (expensed) lease, the lease-end purchase price is capitalized and amortized over the remaining useful life of the asset; it has no effect on the original classification of the lease. I don't remember the rule regarding an exercised purchase option at the end of a capital lease (it's been a long time since I had to know this). FASB Statement 13 covers this in excruciating detail if you really want to know more, but beware of all the interpretations and amendments...