Making the decision to lease vs buy construction equipment
Regardless of the size of your construction or general contracting business when you need new equipment, whether for the jobsite or the office, you’ll need to decide whether to lease vs buy. Knowing the advantages and disadvantages of each should help you decide. Also getting guidance from a tax and leasing expert is always a good idea.
Cash flow
If operating funds are limited, leasing can be an excellent choice. Leasing construction equipment allows you to get what you need with less cash on hand. Leasing rarely requires a large down payment so you can get the equipment without significantly impacting your cash flow.
Leasing terms are more flexible so you can negotiate longer lease periods to lower your monthly payment. If credit is a problem, by leasing construction equipment you won’t have to find someone to extend you credit for purchasing equipment.
In addition, leasing usually allows you to get a more expensive model than you can afford to buy outright. More advanced equipment features, capacities and technological enhancements can improve your productivity and profits – and perhaps even the types of general contracting or remodeling jobs you can bid on – making the decision to lease an excellent choice.
On the other hand, unless it’s a condition of the lease, when the lease term is up, you do not own the machine. If you want to keep the equipment long-term and establish equity in it, try to negotiate a purchase option with your lease so that some or all of your lease payments are credited to the purchase price. With this type of lease, the purchase price is determined at the time you lease the equipment.
Keep in mind that when you lease rather than buy, you may be paying more for the same item. To get the total cost of the construction equipment, compare the entire cost of the lease with the purchase price and any finance charges.
Equipment upgrades if you lease vs buy
If you lease equipment you can often exchange it for newer models. As newer technology becomes available, leasing companies will offer incentives to trade your used equipment for new and perpetuate the lease.
If you decide to buy your construction equipment, you own it. If you need to upgrade, you’ll have to sell your used equipment to get something newer.
Tax considerations
Tax benefits of leasing can be very beneficial. Monthly lease payments are typically tax deductible and depending on the type of equipment you are leasing and the length of the lease, you may also be able to claim the leased equipment as a capital asset, furthering lowering your tax burden.
When you buy equipment, it is immediately considered a capital asset. Typically you can write off the value of the equipment over five years; however, there are tax law changes that may allow you to deduct the entire cost in the first year, which is a significant cost savings.
Consult a tax professional so you are fully informed about tax benefits.
Lease types
If you decide to lease vs buy, remember there are many kinds of leases. An “operating” lease is common. With that lease, the company you lease from pays for equipment maintenance, taxes and insurance, which can lower your cost even further.
In contrast, with a “finance” lease, you are responsible for maintenance, tax and insurance costs. However with a finance lease, the equipment is considered “owned” from a tax perspective and the tax incentives for equipment purchases apply.
Lease terms can be complicated, and some leases cannot be changed or canceled. It is common for a business to continue to make payments even though they are no longer using the equipment. Some leases do allow early termination but that option will typically come with significant penalty charges.
Every construction business has different needs and circumstances that impact the decision to lease or buy the equipment they need. Before you decide, create a cost benefit analysis that considers the cost of financing, insurance, and maintenance; the life span and potential for equipment enhancement; and tax benefits and opportunities.
The advantages of equipment rental
If you need equipment for a particular construction or remodeling job and prefer not to purchase or lease it because you don’t know if you’ll need the machine or tool again, consider renting it. Tool rental companies, such as The Home Depot Tool Rental Centers at many Home Depot locations, have a wide selection of professional tools for building, compaction, demolition, floor care, landscaping, painting, plumbing and remodeling jobs.
Tool rental centers are open more days and more hours to make it easy for you to rent the equipment when you need it and return it at the end of the rental period. For small construction or general contracting business, renting equipment is also a great way to try out a machine or tool before buying it.
