Rent vs Buy : business edition.
BUSINESSES are potentially making A BIG MISTAKE 💸🤦🏽♂️
I often speak to new business owners, and when I ask about their equipment, almost all of them will say they PURCHASED IT OUTRIGHT. This could be a MISTAKE.
It does NOT matter if your business is in construction, coffee, or customer service. Leasing should be an option worth considering. Here's why👇🏽
Let's say a business in Quebec is considering purchasing a piece of equipment for $50,000. They have the necessary funds available to make the purchase upfront. They can benefit from...
PROS OF BUYING
📉 DEPRECIATION: The business can claim depreciation on the equipment over its useful life. In Quebec, the depreciation rate for this type of equipment might be 20% per year.
💳 INTEREST EXPENSE: If the business took a loan to buy the equipment, they might have interest expenses, which can be tax-deductible.
🧮 TAX ADVANTAGES: The depreciation and interest expenses CAN REDUCE the business's taxable income, resulting in LOWER TAXES.
⚠️CAVEAT EMPTOR: The business pays $50,000 for the equipment, reducing their cash reserves.⚠️
PROS OF LEASING/RENTING:
💳LEASE PAYMENTS: Theses are considered operating expenses and are fully deductible, reducing the taxable income of the business.
💰CASH RESERVES: Instead of paying $50,000 upfront, the business pays $1,000 per month, which preserves their cash flow for other expenses or investments.
🧘🏽FLEXIBILITY: At the end of the lease term, the business can choose to renew the lease, upgrade the equipment, or return it.
IS LEASING RIGHT FOR YOUR BUSINESS?
1️⃣Leasing provides a consistent and predictable tax benefit (deductible lease payments) each year, whereas buying offers tax benefits through depreciation, but it's spread over several years and subject to specific rules.
2️⃣Leasing preserves more cash upfront, which can be crucial for maintaining liquidity and covering other operational expenses.
3️⃣ Leasing allows the business to adapt to changing technology and equipment needs by easily upgrading or changing equipment at the end of the lease term.
I'm Carlo and I'm NOT your average advisor. IF you benefitted from this post, maybe YOU should join me for a virtual coffee.
