Looking to rent or lease rather than buy? We highlight the advantages and disadvantages

The decision to lease or rent will depend on the specific context and you/your business's individual needs and circumstances.

Here are some benefits associated with leasing or renting compared to purchasing:

Benefits

• Lower initial costs: The main advantage of renting/leasing is the lower upfront costs compared to purchasing which can be beneficial to those with limited capital.
• Easier budgeting: Lease payments are typically fixed and predictable, making it easier to budget and manage cash flow. This is particularly useful if a business has tight financial constraints.
• Flexibility: Leasing can provide flexibility in terms of contract duration. This is beneficial for businesses with changing needs, allowing them to adapt to circumstances more easily.
• Preservation of capital: You will benefit from having the asset without an expensive upfront outlay of cash meaning you can preserve your capital for other business needs. The debt will be secured against the asset and so does not reduce existing lines of credit.
• Up-to-date equipment: You may be able to upgrade the asset at the end of the lease term, ensuring that you always have access to the latest technology without the financial burden of purchasing new equipment outright.
• Maintenance and repairs: Often lease agreements include maintenance and service agreements so the lessee is not responsible for repairs or maintenance. This means predictable monthly costs and reduced downtime.
• Reduced risk of obsolete equipment: The equipment can be replaced at the end of the lease term with the latest technology, with no cost to dispose of existing equipment.
• Tax advantages: Generally speaking, lease rental payments are fully tax deductible as operating expenses which can be useful for businesses seeking to minimize their taxable income.

Your accountant can advise if there are balance sheet implications of an operating lease or rental agreement. i.e., you may not have to disclose the liability of future payments.

Seek advice from a TaxAssist Accountant for your specific situation.

Disadvantages

Check the terms and conditions as these will vary considerable from lessor to lessor. In particular pay attention to:

• Early termination penalties.
• Rollover payments. This is an additional payment if you fail to meet administrative requirements.
• Continuing to pay the rent after the initial contractual term has expired.
• Excess use charges. This can apply when the lessee exceeds the contracted usage.
• Onerous wear and tear charges and return charges.

It's important to note that while leasing or renting has its advantages, purchasing also offers benefits such as ownership, potential long-term cost savings, and the ability to build equity in the asset.

Carefully consider the operational life of the asset. The impact of technology changes on the asset, the volatility of the future value of the asset, how critical the asset is to the day-to-day operation of your business and the ease at which the asset can be upgraded or replaced.

The decision ultimately depends on your specific circumstances and priorities.

TaxAssist Accountants is here to help with all of your tax and accounting needs. Call us on 08 6245 7506 or contact us here to arrange a free initial consultation.

Last updated: 19th January 2024