All businesses will have major purchases of some sort.  These major investments and equipment/machinery can be a big decision.  You need to take into consideration how it will affect the bottom line of your company.  If you are very profitable (I hope everyone is), you may need to think about adding to your expense line instead of the asset line.

If you purchase an asset, you can’t necessarily expense the entire amount.  You will be able to expense an amortized amount, interest, insurance, etc.  A lease will allow you to expense the entire amount.  The usable life of equipment can also help make the choice (i.e. do you really want to lease a computer for five years when it will be obsolete in three or less?).  Your overall financial history, cash position and projections can help make this decision.

There is a big difference between a Fair Market Value (FMV) lease and a $1 Buyout lease contract:

• A FMV lease generally means that you will have a substantial payment due at the end of the lease if you want to own the equipment.  For example, you lease a truck over a four year period and if you want to buy it at the end of the lease for $5,000.  This is a true lease.
• A $1 Buyout lease to purchase the same truck will have a higher monthly payment.  However, when the lease term ends in four years you have the option to purchase the truck for a small fee…like $1.00.  Of course you are going to buy a truck for a dollar.

While the second scenario is called a lease, it really isn’t for tax purposes…it is essentially a finance deal because of the relatively low final payment to own it.  Therefore it is classified as an asset, not an expense and you need to communicate this to your tax professional.

No matter how you acquire equipment or other major investments, the factors are numerous in making the decision.  There is no wrong answer, just the right one for you and your business.