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

Leasing servers

[suso]

If it was a server, I think a major factor would be how far in advance could you get your boss (if you have one) to buy replacement servers so that you can start migrating the services to the new system. A lot of times, server and service migrations take longer than expected and so you might wind up having buy the server outright at the end of the lease because you aren't ready to migrate yet. Its not like leasing a car (which I do) where you can just take your stuff out, put it in your garage and then go swap cars.

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...

Wrong question to the wrong audience

[CaptainZapp]

Mate, your question makes about as much sense as asking "How long is a piece of string?".

For starters: I assume that you're in the US, but could imagine that some of the tax laws, which apart from keeping your liquidity fluid, but for a price, is about the only fathomable reason why you would want to lease in the first place, differ from state to state.

If it's a matter of keeping your gear in top notch condition and fixed 30 minutes after failure you might be better advised with a support contract including a service level agreement.

Cutting to the cheese: You are better advised to ask your CPA, or if you insist on getting fancy, your tax attourney.

HTH, HAND, etc...

Too Many Factors

[American AC in Paris]

Dear Slashdot,

As I understand it, sin(x) can have values between positive 1 and negative 1. Is my x going to be positive or negative?

A little bit of background: I have a value of x somewhere between 0 and pi.

Snark aside, this really isn't an issue where you should be guided by ancedotal evidence posted to Slashdot. You're working for a Fortune 100 company, for crying out loud--you need a carefully-planned methodology, not a bunch of yammering 'experts' giving you off-the-cuff advice on a very complex problem...

Re:Too Many Factors

[HermDog]

Snark aside, this really isn't an issue where you should be guided by ancedotal evidence posted to Slashdot. You're working for a Fortune 100 company, for crying out loud--you need a carefully-planned methodology, not a bunch of yammering 'experts' giving you off-the-cuff advice on a very complex problem...

I used to work for a Fortune 50 company, where these types of decisions were evidently often made based on which vendor had the cutest sales staff.

Leasing vs. Purchasing, short version

[192939495969798999]

If you lease, you pay less now. If you purchase, you potentially pay less later. However, there are complications on your taxes for either (depreciation vs. amortization, lease payment costs, etc.) In General, I would expect purchasing to be a better deal unless you are expecting to have high turnover of machines and volatility of business (i.e. contract job only requiring machines for 12 months = definitely lease!)

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.

Re:it's all in the taxes

[SunFan]

This is essentially an apparently legal scam to allow you to write it all off.

When it comes to reducing taxes, nothing is a scam if it is legal. Paying the lowest tax allowable by law is every citizen's duty to their country.

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

Talk to the accountants and lawyers

[anomaly]

This idea made no sense to me back in the days when I worked for a 'Big Six' accounting firm - you know, when dinosaurs roamed the earth?

However, at the time, this organization was legally a limited liability partnership. As such, any assets were problematic for a couple of reasons.
1. Capital expenditures must be depreciated over a multiple year cycle - you may pay $10K for that box, but you have to treat the box as if it's worth $10K this year, $6K next year, $3K the next, etc. We all know that computers depreciate more rapidly than cars, and there's no way that you could recoup 60% of the purchase price 12 months after purchase of a box. Expenses, however, are written off as they happen. Spend $10K on a lease this year, and you write off $10K THIS year.

2. You also show no value for that asset because it's not yours. This matters when the partners are concerned that a lawsuit loss might cause assets to be liquidated and LLCs like to have as few assets as possible. The less there is, the less that can be taken - or so the thinking goes.

So, it may cost more actual dollars the way you're doing it, but I bet that the accountants and lawyers have it figured out so that it's really in the best interest of your organization to 'waste' that money.

Hope this helps!

Regards,
Anomaly