Questions to Consider in an Equipment Transaction

 By Kevin F. Clune, CLP


“How long do you anticipate your company will use the equipment?” is ordinarily the first question a business owner or purchasing manager should answer before deciding how to finance new or replacement equipment. The second question is normally “Which type of financing will be more advantageous from a tax perspective?”

Conventional wisdom holds that the useful life of most capital equipment is rarely over three years. The second question should be answered in consultation with a professional tax accountant. They may inform you that a cash purchase or a bank loan is typically depreciated according to IRS standards known as MACRS. This depreciation term can be as long as 60 to 84 months.

If the equipment is leased, which is usually a 36 month term, it can possibly be written off over the same term as the lease. If the lease term more closely matches the useful life of the equipment, this would be the financing method of choice. 

In some cases, it is difficult to predict how quickly the newly acquired equipment will become obsolete. Business owners are constantly bombarded by announcements of new and improved technology. We recently received an invitation to join a webinar presented by an equipment manufacturer to learn about their latest developments. They claimed that success depends on “understanding the trends that are shaping today’s business world, (and) you need to be able to harness these trends by empowering your employees.”

While this was an enticing invitation, I wondered if the manufacturer included financing tips in their webinar? It is
one thing to showcase the technological advances you offer but how long before the next new development? Which method of financing will be cost effective and also keep you on the cutting edge of technology? 

An equipment lease may be the solution to this dilemma since it will not only be the preferable means of financing from a tax perspective, it will also provide the greatest in flexibility. At the end of the lease term, you will have many options:

                1. Upgrade into new equipment.
                2. Renew your lease for an additional term.
                3. Go month to month
                4. Purchase the equipment.
                5. Return the equipment.

With these choices, companies will be well positioned to “harness new trends” so they remain competitive. Additionally, an equipment lease may have tax advantages over a bank loan or cash
purchase.  

A trusted and knowledgeable equipment vendor can predict the useful life of the equipment. Your professional tax
accountant can be consulted to determine the optimum means of financing. Armed with this knowledge, a business owner may ultimately decide that a lease is the most cost effective option given their situation.  


Kevin F. Clune, CLP
Clune & Company