Most businesses rely on some form of equipment to run their daily operations. These corporate assets are crucial for the smooth functioning of the company. One of the critical decisions enterprises must make prudently is assessing whether to buy the equipment outright or leasing alternatives. Another question that concerns businesses is whether it is more tax advantageous to purchase the equipment or lease it.
Like all financial matters and decisions, there is no one right answer. Different options work for different businesses based on a variety of intrinsic and extrinsic factors.
Here are some aspects that you could keep in mind to make the right decision when it comes to your equipment
This option is when businesses decide to own the asset and make an outright purchase. In this case, the ownership of the machinery rests with the company right from the day of purchase. Businesses can make such purchases by investing the company’s savings or accessing financing in the form of equipment loans from institutions like Tata Capital.
Advantages offered by Purchasing Equipment:
The Income-tax Act, 1961 allows a taxpayer to claim depreciation on an asset. However, a business can avail of this provision only if they own it or use it for commercial purposes. Ownership is better if companies have more to gain from claiming depreciation on owned assets. Additionally, there could be tax benefits of lump-sum equipment purchases applicable to specific industries.
Ownership & Control
Businesses might prefer complete control and ownership of assets, especially for equipment that is critical to the company’s very existence. Outright purchase of equipment allows businesses to take full ownership of the machinery and employ it as they fit to support their business. Also, in cases where the usability of the asset spans for a longer tenure, owning the asset makes more commercial sense than leasing as the equipment would not need to be upgraded every few years.
However, outright purchase of equipment requires the availability of a hefty corpus to invest upfront. For businesses looking to invest in equipment without access to the necessary funds, Tata Capital offers Equipment Financing. An equipment loan will help fund the outright purchase of equipment while maintaining your cash reserves.
On the other hand, leasing allows enterprises to take the equipment needed on hire without investing upfront. Leasing looks attractive when seen from a cash flow perspective as it frees up capital.
Advantages offered by Leasing Equipment:
Frequent Equipment Upgrade
Given today’s rapid pace of technological advancements, equipment procured for businesses might get obsolete soon. For asset classes that require regular upgrades, leasing might be advantageous as they can be easily traded-in for the newer upgraded equipment.
Limited upfront investment
For businesses with limited capital reserves, leasing is an excellent solution. It offers easy access and use of the latest technology without requiring large sums of upfront capital investment. Moreover, the business can derive higher revenues from using the new equipment as they service the lease rentals.
The lessee can claim tax benefits for payment of lease rentals. When you lease equipment, you spread out the expense over a period as lease rentals instead of paying upfront cash. These monthly outflows are accounted as operational costs, thereby reducing the taxable income.
Additionally, depending on the nature of the lease agreement, you can also claim depreciation on the leased asset and add to your tax savings. Capital leases with a predefined buyout clause are eligible for such depreciation claim.
Additional Read: 7 Tips for Business Equipment Financing & Leasing
Invest in Core Competencies
Instead of investing capital upfront on equipment, companies can improve the return on equity by investing in core areas of the business. Through this approach, an organization can limit its liabilities and redirect its capital to earn higher returns.
At Tata Capital, we offer a variety of leasing structures that are tailor-made to suit unique business requirements. Reach out to our leasing experts for guidance on what would be an appropriate leasing solution for your asset requirements.
Ultimately, no one solution is an absolute fit for a particular business. It may vary depending on the nature of the industry, inherent aspects of the company, availability of funds and working capital, business goals, and the class of machinery. Moreover, these are long-term decisions that affect the future of a business. Talk to Tata Capital experts to gauge whether purchase or leasing is best suited for your needs.