Business Assets and Equipment — Legal & Practical Considerations
If you are a business owner, you may have both tangible and intangible forms of assets. Tangible assets include any real estate and structures that your business owns, in addition to tools, equipment, or other objects that you need for the business. Intangible assets consist of the goodwill and reputation associated with your business, as well as any intellectual property that your business possesses. This can come in the form of patents for businesses with a technical focus, or copyrights for businesses with a more creative angle. Any type of business can have trade secrets, which consist of information that is not generally known but relevant to the operation of a certain business. Also, any business can have trademarks to protect and distinguish its brand from competitors.
Why Buy an Asset
Many tangible items of property, such as vehicles or computers, lose value over time, so you can claim depreciation on your taxes if you buy them. If you will need a tangible asset permanently, or until it breaks down, you should be aware that the cost of purchasing it probably will be less than the cost of leasing it. However, owning an asset means that you are responsible for maintaining and repairing it. You also will need to make a larger upfront payment, which can take away from your operating expenses. A prudent business owner will check their accounting situation to confirm that they can handle this expense in combination with others.
If you do not have enough cash to buy an asset outright, you can consider using a line of credit with your bank or look for more funding. You can also take out a loan to spread the cost over time. The total cost if you use a loan will be greater than buying an asset with your own cash, however, since loans come with fees and interest.
Why Lease an Asset
Leasing may be a better option if an asset is expensive or if you do not have a large amount of cash on hand. In some cases, it can be more cost-efficient than buying an asset under a loan. You will not need to handle maintenance for a leased asset, and lease payments are usually tax-deductible. If it turns out that the business no longer needs the asset after a short time, or if you are disappointed in its quality or performance, it is easier to get rid of the asset. However, as mentioned above, leasing does tend to be more expensive in the long term than buying an asset with cash. You also usually cannot account in your taxes for the asset’s depreciation.
You can try to structure the length of the lease in a way that aligns with your business needs and the way in which you plan to use the asset. This may involve a shorter lease with higher payments or a longer lease with lower payments. Sometimes a lease includes a buyout option that allows a business to buy the asset when the lease ends.
Capital Leases
This is a type of lease that more closely resembles a loan than a rental. When you use this lease, you can claim depreciation on the asset and own it for accounting purposes. You are responsible for maintenance and repairs, as well as the cost of replacement, and you are required to pay taxes on the asset. If you are considering a capital lease, you may want to think about whether you should simply buy the asset, perhaps with the help of a loan.
