Lease Versus Purchase

Full Answer Section

     

• Ownership: At the end of the lease term, the lessee can return the equipment to the lessor or purchase it at fair market value. With purchasing, the lessee owns the equipment outright at the end of the lease term.
• Maintenance: Leasing typically includes maintenance costs in the monthly payment. With purchasing, the lessee is responsible for all maintenance costs.
• Tax implications: Leasing and purchasing have different tax implications. Leasing is generally considered to be an operating expense, which is deductible from taxable income. Purchasing is considered to be a capital asset, which is depreciated over time.

Purchase Costs The following table shows the costs associated with purchasing the CT scan equipment:

Year	Principal Payment	Interest Payment	Maintenance Expense	Total Expense	PV Expense
1	$260,000	$130,000	$12,000	$402,000	$402,000
2	$260,000	$104,000	$12,000	$376,000	$338,709
3	$260,000	$78,000	$12,000	$350,000	$278,676
4	$260,000	$52,000	$12,000	$324,000	$223,388
5	$260,000	$26,000	$12,000	$298,000	$172,332
Total	$1,300,000	$490,000	$60,000	$1,850,000	$1,415,105

drive_spreadsheetExport to Sheets Lease Costs The following table shows the costs associated with leasing the CT scan equipment:

Year	Lease Payment	Maintenance Expense	Total Expense	PV Expense
1	$26,000	$0	$26,000	$26,000
2	$26,000	$0	$26,000	$23,646
3	$26,000	$0	$26,000	$21,436
4	$26,000	$0	$26,000	$19,388
5	$26,000	$0	$26,000	$17,475
Total	$130,000	$0	$130,000	$108,381

drive_spreadsheetExport to Sheets Tax Implications Leasing Leasing is generally considered to be an operating expense, which is deductible from taxable income. This means that the lessee can deduct the full amount of the lease payment from their taxable income in the year in which it is paid. Purchasing Purchasing is considered to be a capital asset, which is depreciated over time. This means that the lessee can deduct a portion of the cost of the equipment from their taxable income each year. The amount of the depreciation deduction depends on the depreciation method that is chosen and the depreciable life of the equipment  

Sample Solution

     

Leasing and purchasing are two different ways to acquire equipment. Leasing is a short-term agreement in which the lessee (user) pays the lessor (owner) a monthly fee for the use of the equipment. Purchasing is a long-term agreement in which the lessee acquires the equipment outright.

There are a number of factors to consider when deciding whether to lease or purchase equipment, including the following:

• Upfront costs: Leasing typically has lower upfront costs than purchasing. This is because the lessee does not have to pay the full cost of the equipment upfront.
• Monthly payments: Leasing typically has lower monthly payments than purchasing. This is because the lessee is only paying for the depreciation of the equipment over the lease term.