Business Equipment Leasing vs. Financing

[Ilagon]

A friend and I are starting a up a business and looking into purchasing a $30,000 printer for the company. Can anyone shed some light on the benefits of leasing over financing and vice versa? My understanding of business tax and accounting isn't the greatest.

I have been e-mailing back and forth with a lendor and he has mentioned that the lease can be considered an operating expense and a portion of it is tax deductable. Does this tie in with CCA classes and what class the printer falls under?

The terms of the lease would be 25% down on a 3 year term with monthly payments of $800. My other option would be to get a LOC.

Thanks in advance.

[PJ]

There are many ways to look at this.. and it depends on your financial situation, start up costs, and so on..

I'm no expert either.. but I would go with the lease.. It doesn't tie up your capital, which is a big plus, considering you're still starting up. And if you ever have a problem with the printer, it's a lot easier to get the company's attention while you're still paying them monthly. And with leasing you can write off the entire lease payment (assuming this is 100% for business use, but you're the ones keeping track), as opposed just the interest on financing through your bank.

I'm interested in this topic as well, if anyone has anything to add.

[tiger_handheld]

for starters, you can do a lease vs. buy analysis (I'd do it for you, but you are missing information such as - salvage value, tax rates). That'll spit you an amount based on numbers. But a good decision is based on qualitative characteristics as well.

You'll have to think about obsolesce, initial cash outlay, asset base/collateral requirements etc. etc.

The lease buy will take into consideration CCA costs- so yes, it is all tied in. What kind of printer is it? I'm going to assume it's a standard printer for some sort of design purpose so it'll be class 52. If it's related to manufacturing and can be considered "manuf. equipment", it will be class 29.

I know my response isn't giving you an answer on the platter and it's on purpose (I have to eat too ) I think I've given you enough info to search google and figure out?! Feel free to ask if you have more questions. It's free as long as I don't have to do much


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[Ilagon]

Thanks for the replies. We are purchasing a top end direct-to-garment printer. Would this be considered as manufacturing a product because we're printing on blank t-shirts?

What I'm most confused about is if it is what PJ mentioned. The printer will be only be used for the business. If it is true that the entire lease payment can be written off, what is stopping someone from registering a company and writing off a lease, therefore saving money? What records would you need to show/keep that the equipment was only being used for the business?

Currently, we have a budget of 20,000 to start. After six months, more capital will become available. My friend and I would be able to purchase the printer outright in six months but we feel that we need to acquire it now as one is currently available. There is currently a wait time for the printer due to its high demand.

[PJ]

Originally Posted by Ilagon

What I'm most confused about is if it is what PJ mentioned. The printer will be only be used for the business. If it is true that the entire lease payment can be written off, what is stopping someone from registering a company and writing off a lease, therefore saving money? What records would you need to show/keep that the equipment was only being used for the business?

Nothing is stopping anyone from doing that. But if the CRA questions you about it and you can't answer diligently, or provide some sort of proof, then they can rape you even harder for more than the money you would've saved by setting up a company just for a lease write off.

If it's something like a screen printer then it's pretty obvious that that is for business purposes only.

But say if it's a car, and you use it 50% for work and 50% personal, then you only write off the 50% for business. Though CRA is more anal about cars (gotta log your mileage and stuff.)

With home offices, I know people who wrote off 50% of a flat screen TV and claimed it as a presentation tool, 50% of couch, coffee table and claimed it as office furniture, and so on.

If audited, the main question CRA has for you will be "how does this purchase help you increase profits?" If you can justify your write-off's, you will be fine. The more records you keep, the better. Other than your receipts, there's no standard form, it's just something you do on your own for more credibility.

Again, I'm no expert. We just recently incorporated our business as well, and we're still learning every day as we go along. Maybe tiger_handheld can shed some more light here

[4444]

in a start up, cash is king - lease it and negotiate a BPO (bargain purchase option) at the end of hte lease - may 'cost' more over 5 years or whatever your term ends up being, but spreading the payments, not having plopped down $30K (less unknowns/less risk, in my eyes), and the tax benefits (i assume you get large tax deduction with the lease than the CCA deduction, based on this is the norm for things, from my experience)... and if it goes tits up, you can always walk away from the lease, the leasing company takes the printer back - you're not down $30K less what you sell it for, you're just down the downpayment & the lease payments made

cash & decreased risk are your friends when starting up

[Hehe]

Do you happen to know the allowable depreciation rate of the printer or the category it falls into?

I am not expert, but from past exp in an IT business, there were years which we could write off huge amounts of depreciation (up to 100% IIRC) on our equipments. And buying made a lot more sense than leasing.

But it depends on your business really. If this printer could require upgrade a few years down the road, then leasing seems more logical as you would need to upgrade. But if it's something that you would use until it bites the dust, you might want to look at depreciation.

[tiger_handheld]

Originally Posted by Ilagon

Thanks for the replies. We are purchasing a top end direct-to-garment printer. Would this be considered as manufacturing a product because we're printing on blank t-shirts?

What I'm most confused about is if it is what PJ mentioned. The printer will be only be used for the business. If it is true that the entire lease payment can be written off, what is stopping someone from registering a company and writing off a lease, therefore saving money? What records would you need to show/keep that the equipment was only being used for the business?

Currently, we have a budget of 20,000 to start. After six months, more capital will become available. My friend and I would be able to purchase the printer outright in six months but we feel that we need to acquire it now as one is currently available. There is currently a wait time for the printer due to its high demand.

Yes it would be considered manufacturing equipment, therefore it would fall under class 29. CCA rate for class 29 is 25% in yr 1, 50% in yr 2, and 25% in year 3 - any amount not claimed can be claimed in years after.

Nothing is stopping anyone from setting up a company and writing off a lease. I dont see what your concern is. If its a legit business expense (you can show that without the printer your t-shirts would not be sell-able) you have a case. Also, further proof will be lease documents with business names and a business bank account showing monthly lease payments. My answer may seem confusing, that's because I'm confused by your question - sorry.

Originally Posted by PJ

Nothing is stopping anyone from doing that. But if the CRA questions you about it and you can't answer diligently, or provide some sort of proof, then they can rape you even harder for more than the money you would've saved by setting up a company just for a lease write off.

If it's something like a screen printer then it's pretty obvious that that is for business purposes only.

But say if it's a car, and you use it 50% for work and 50% personal, then you only write off the 50% for business. Though CRA is more anal about cars (gotta log your mileage and stuff.)

With home offices, I know people who wrote off 50% of a flat screen TV and claimed it as a presentation tool, 50% of couch, coffee table and claimed it as office furniture, and so on.

If audited, the main question CRA has for you will be "how does this purchase help you increase profits?" If you can justify your write-off's, you will be fine. The more records you keep, the better. Other than your receipts, there's no standard form, it's just something you do on your own for more credibility.

Again, I'm no expert. We just recently incorporated our business as well, and we're still learning every day as we go along. Maybe tiger_handheld can shed some more light here

See answer above. You are right, you must be able to proove that it's a legit business expense. I don't think any Joe can drop 30k for a printer/pay $800 mo for a printer. Just taking his word, I'll accept it as a biz expense.

Originally Posted by Hehe

Do you happen to know the allowable depreciation rate of the printer or the category it falls into?

I am not expert, but from past exp in an IT business, there were years which we could write off huge amounts of depreciation (up to 100% IIRC) on our equipments. And buying made a lot more sense than leasing.

But it depends on your business really. If this printer could require upgrade a few years down the road, then leasing seems more logical as you would need to upgrade. But if it's something that you would use until it bites the dust, you might want to look at depreciation.

His printer is considered manuf equipment. Only class 52 - IT equipment and general computer crap can be written off 100%. So you are correct in a sense.

Seriously, do a lease v. buy analysis it'll answer most your questions. And then think of all the qualitative factors and make a decision. I've made recommendations where numbers said "lease" but companys goals and future plans suggested buy. So I went with buy. Many ppl think its all about the numbers - it's not , in this case anyway.

Food for thought: You are a start up - which will require lines of credit/collateral for expansion in the future - do you think off balance sheet financing is a good idea? Most lenders like assets so if you have a 30k printer thats in high demand lets say salvage value is 10k - i'm sure it would qualify for a loan of atleast 10k. Again, i'm not saying buy is the right answer , but my goal was to make you think

[lowside67]

Disclaimer, I am only an accountant in training but I am also a pretty good one...

From the perspective of a company leasing equipment from another company, there are two possible treatments that the lessee may have to apply. An operating lease is basically a "rental" and can be expensed 100%. A capital/finance lease is basically a "financing arrangement" and cannot be expensed in the same way.

The three criteria are as follows:
1) There is a reasonable chance you will buy the item at the end of the lease
2) The lease term is > 75% of the useful life of the item
3) The PV of the lease payments is > 90% of the fair value of the item

If one or more of those three criteria are met, you MUST treat it as a capital/finance lease which means you must record the printer on your balance sheet as an asset and can only depreciate it as per CCA allowances which are discussed above, not the whole amount of the lease payment. You also must record the associated liability of the remaining lease payments.

I would need more information pertaining to the actual case in point to help you determine what type of lease it would be - specifically how long one of those printers is good for, the monthly payment, and the price to buy it outright today.

Hope that helps,
Mark

[Ilagon]

Thanks again for the replies guys. I believe it is considered a stretch lease, as we have the option to buy it out at the end of the term for $10.00. The printer should be good for at least 5 years. What information would I need exactly to do a lease vs finance analysis?

TIA.

[lowside67]

Okay, it will definitely be a capital lease then. The depreciation schedule will be identical whether you lease or finance so basically it's just going to come down to the interest rate and payment details.

Mark

[Ilagon]

Thanks Mark. If this is the case, would it be more beneficial to lease then in order to free up capital and having the ability to write off a portion of the lease payments?

[lowside67]

Why would it free up more capital? A financing arrangement = monthly payments, so would a lease... you aren't giving us all the terms so it's hard to say.

Mark

[Ilagon]

If we go down the financing route, we would put down a large down payment in order to have lower monthly payments. In doing so, we would be cutting in on our ability to invest more in inventory and advertising.With an interest rate of about 7% on an LOC, our monthly payments over a 5 year term would be around $390.00.

With the lease option, it would 25% down ($6500), over a 3 year term with monthly payments of $800.

I also found this from another website: "An operating lease does not prevent you from purchasing the equipment outright at the end of the lease term. You simply have to pay fair market value for it, as opposed to the nominal amount you would expect to pay with a capital lease."

In this scenario, would it be more beneficial to lease if it can be categorized as an operating lease (100% deductible if I'm not mistaken)?

Thanks for everyone's patience and knowledge!

[lowside67]

A $10.00 buyout price is by definition a bargain-purchase option which will automatically categorize it as a capital lease.

In addition, the PV of $6500 + 36 payments of $800 at 7% is $32,417.28 which is also greater than 90% of the cash price so that will also make it a capital lease.

Under the terms you are talking about, there is simply no way that this can be categorized as an operating lease, period.

It's also worth noting that at the end of the day, you get to write off the exact same amount either way, it's just simply a difference of writing it all off over 3 years (length of the lease) or 5 years (length of the asset life as per you).

Mark

[Ilagon]

Thanks again Mark. I've talked to my business partner and we feel that we're going to down the financing route.

But any more advice would be greatly appreciated. Thanks RS!

[4444]

Originally Posted by lowside67

Disclaimer, I am only an accountant in training but I am also a pretty good one...

From the perspective of a company leasing equipment from another company, there are two possible treatments that the lessee may have to apply. An operating lease is basically a "rental" and can be expensed 100%. A capital/finance lease is basically a "financing arrangement" and cannot be expensed in the same way.

The three criteria are as follows:
1) There is a reasonable chance you will buy the item at the end of the lease
2) The lease term is > 75% of the useful life of the item
3) The PV of the lease payments is > 90% of the fair value of the item

If one or more of those three criteria are met, you MUST treat it as a capital/finance lease which means you must record the printer on your balance sheet as an asset and can only depreciate it as per CCA allowances which are discussed above, not the whole amount of the lease payment. You also must record the associated liability of the remaining lease payments.

I would need more information pertaining to the actual case in point to help you determine what type of lease it would be - specifically how long one of those printers is good for, the monthly payment, and the price to buy it outright today.

Hope that helps,
Mark

accounting != tax treatment - don't confuse the two (i'm a CA, many years experience, no i'm not going to refresh my knowledge of tax treatment of it, although i'm pretty certain its either acquired & CCA rate applied to capital, or leased in whcih case lease payments are deductible each period)... lots of 'CASB' type answers here which are probably misleading

[4444]

i would also suggest partnering with someone who is familiar with cash management, financial/legal sides of things - you would be amazed at the things you expose yourself to when doing business - lots of risk out there, you need to mitigate that