Owning a business requires you to make a lot of important decisions, and these decisions could have long-term impacts. One of them is deciding whether to buy or lease a business asset. Sometimes, buying is a better option than leasing, and vice versa. The decision depends on the financial and business situation, the asset value, usage, expected return, and tax implications. Both buying and leasing have their advantages and disadvantages. You can plan accordingly once you know your decisions’ tax and financial implications. 

This article will examine things small business owners should consider when deciding on business assets like property, vehicles, machinery, and licenses. 

When Should Small Business Owners Buy a Business Asset? 

Buying an asset gives you its ownership, and that’s its most significant advantage. You can use the asset for business operations, lease it out when not in use or sell it off and earn sales proceeds. You can depreciate the asset value under the Capital Cost Allowance, spreading the purchase cost over time. 

However, these benefits come with a significant upfront cost of the purchase price. Over and above this cost, you have to bear other expenses like due diligence, legal expenses (to ensure proper transfer of ownership), repairs, maintenance, taxes, loan interest, and insurance. 

After knowing the good and bad of owning a business asset, it makes business sense to buy an asset if,

• You have idle cash or easy and reasonable financing available to buy the asset.
• The long-term return on assets will be higher than it costs  
• The asset is rare and difficult to acquire
• Its value will grow over time 
• Tax benefits 

Let’s take a generic scenario where buying a business asset is better. You are an established business that will continue to operate for decades. You are looking to buy a retail space and have found an ideal spot closer to the warehouse and marketplace. If you have a sufficient capital budget and no other investing opportunity, you are better off buying the asset instead of leasing it. 

For instance, Ethan is a baker with $100,000 in cash reserve and is looking to buy two industrial baking ovens as he expands his business. Ovens are a prerequisite for a baker. And the high use of these ovens could depreciate the asset value faster. As Ethan has sufficient money and high business needs, buying ovens makes business sense. 

But if Ethan plans to retire in a year and close the business, then he is better off leasing ovens instead of buying them. Similarly, if the business asset is likely to become obsolete in the short term, blocking a huge amount by buying the asset does not make business sense.   

When Should Small Business Owners Lease a Business Asset? 

When buying an asset is not an option, leasing can give you access to high-ticket assets at a reasonable price. The initial cost is low, freeing up capital for any upgrades. 

A lease is like a monthly installment you pay for using the asset. And you can deduct the lease amount from your taxable income. The lessor usually bears maintenance, repairs, and insurance costs. A lease can be for a short term or long term. 

However, the lease amount will likely increase over time. If you are taking a long-term lease, your overall cost of the asset is higher than buying it, and you can’t even sell the asset. Many businesses lease assets if: 

• The business use of the asset is for a short-term 
• You are a startup with a low capital budget
• If your business needs are highly volatile 

Leasing is always a better option for the short term and for assets that you need less frequently. For instance, many companies lease an asset for seasonal orders. Some lease a warehouse or rent office space instead of buying it. The higher the ticker price of the asset, the more attractive the leasing option. 

Startups should opt for short-term leases instead of blocking all their capital on buying a few assets. If you don’t have enough working capital, it is better to maintain liquidity and opt for leasing. 

Let’s take the example of a warehouse. If you are an e-commerce company and have found an ideal place for a warehouse, you can consider buying or leasing the warehouse. But if you are a warehousing company with sufficient financing looking to rent storage space to other companies, you might consider buying the asset. The business need for the same asset is different for different companies. 

Hence, your long-term business plans are essential in determining whether to buy or lease an asset. 

Contact McCay Duff LLP in Ottawa to Help You with Business Planning 

A professional accountant can help you decide on buying or leasing an asset by discussing the financial and tax implications. The expert can even guide you on how to avail yourself of incentives or tax benefits offered to small business owners on certain assets. To learn more about how McCay Duff LLP can provide you with your business planning, contact us online or by telephone at 613-236-2367.