Industry Insights

Contractors regularly face financial and tax-planning considerations when deciding whether to lease or purchase an asset. The right decision will provide your company with improved cash flow, tax benefits and other economic advantages. To determine whether leasing or purchasing is most economical and adequately address the short- and long-term costs/benefits, it is important to consider a number of variables, such as:

• Purchase price
• Amount financed
• Annual depreciation
• Tax & inflation rates
• Monthly lease costs
• Equipment usage
• Ownership & maintenance costs

Each of these variables is important, but many companies overlook or misapply them when analyzing whether leasing or purchasing is most advantageous from a discounted cash flow perspective. Equipment usage (equipment hours charged to jobs) and ownership and maintenance costs are not cut-and-dried considerations.

Before deciding whether to lease or buy, you should consider expected equipment utilization. Start by estimating the number of hours the specific piece of equipment will be employed on jobs over its life, which helps you estimate the rental rate to be assigned. With this information, you can quantify the estimated amount of “rental income” that will be generated to offset operating costs. This exercise also will challenge management to assess equipment usage over its entire life and not simply for a single job or one year. Of course, in certain instances, equipment is purchased specifically for a job and sold upon completion, so such equipment would receive special consideration.

In addition to considering the recovery of the initial investment, contractors also should consider total ownership costs of the equipment, such as repairs and maintenance costs, insurance, property taxes and other related expenses. These costs are often given only cursory consideration at the time of purchase but may lead to a different decision if such costs follow a different pattern than what is typically expected.

Each decision should include a sensitivity analysis that factors in the possibility that utilization rates may end up being lower than anticipated. There is little economic justification for storing a “mountain of yellow or green iron” in your equipment yard. Early identification of these costs can help you determine whether to keep equipment for the next big job or to sell or trade it.

Once the initial financial analysis is complete, it’s important to examine the reporting impact on financial statements and tax implications of leasing vs. purchasing as well as evaluating availability of capital in the marketplace and whether equipment is an addition to the fleet or a single-purpose asset. Financial reporting considerations should take into account proposed accounting rules that will require substantially all leases to be accounted for in a manner similar to capital leases.

Regardless of the economic climate, leasing or buying equipment is a large investment. Your company needs to make it count. Contact your BKD advisor for assistance with lease vs. purchase considerations.