There are two ways to acquire IT assets—like servers, desktops, network gear, printers, and software.
Buy them outright
- Lease them from an equipment leasing agency
Many of our customers buy their hardware outright. However, more recently, some of you have asked about leasing instead. They had a lot of questions.
This is WOOF! – we provide answers!
What's involved in Leasing
The leasing process is very similar to buying, in terms of initial setup.
You request a quote for the needed hardware from your IT vendor (like PlanetMagpie). The quote can include hardware, labor to install, a maintenance allowance, even software.
- You agree to the quote and sign the contract and the leasing company provides your IT vendor with a PO.
- The IT vendor performs its work under the contract and bills the leasing company.
- The leasing company bills you for monthly installments on the project.
Some leasing agencies allow you to bundle leased software with the leased hardware. Most commonly, this is Microsoft Windows (server or desktop) and the Office Suite. When the lease term ends, the software is yours to keep. Leased hardware, however, is returned to the leasing agency, refinanced, or purchased for a fair market value at the end of terms.
Would leasing make sense for your business? We interviewed Rawleigh Taylor of CSC Leasing Company
in Virginia. We've worked with Rawleigh in the past and talked to him about the pros & cons of leasing IT equipment.
"It varies by industry and by growth stage," said Mr. Taylor. "Whether due to new contracts, expansion, or simply end of life, every company will need to upgrade equipment at some point. They must first prove ROI for new hardware, while also keeping administrative costs low, over a 3-5 year period. That leads to considering the pros & cons on leasing. Does it make sense for us to lease new equipment at this stage, or to buy it?"
Here's a comparison of those pros & cons. When reading these, consider the position your business is in now. Especially if you're due for an upgrade.
Pros & Cons of Leasing Hardware/Software
Match Cost to Revenues.
Since leases are a monthly fee, they help you match the costs going out each month with revenues coming in. This is particularly valuable to early-stage businesses building their customer base.
Which is the better use of cash for you:
Easier to Stay Current.
- Employee hires, working capital needs, etc.?
- IT hardware, which is a depreciating asset turning over roughly every 3 years?
If you use a 3-year lease cycle for your technology, the lease finishes at about the time new technology becomes available. Making it easy to renew the lease and "refresh" your IT.
Taxes & Insurance Handled.
Sales taxes are wrapped into the lease payment. Property tax is handled separately by the leasing agency (CSC bills it once a year). When it comes to insurance, CSC requests the customer adds them as additional insured to their company insurance policy. This minimizes risk to the equipment, and cost to you. They facilitate this for the customer as part of the contract.
Lease terms are chosen by you, but stretch across several years. This is a long-term commitment and it must be fulfilled. But you can modify the terms of the lease, or even cancel it. There are no fees or costs for modifying/cancelling a lease, aside from fulfilling the lease obligation.
In a "true lease", you are responsible for all maintenance for the IT hardware so you may still have unexpected IT expense for system failures. Maintenance contracts can be wrapped into the lease to help mitigate any maintenance risks.
If you need standard operating software for leased hardware, you can wrap those costs into the lease package. If you need specialty software though (e.g., 3D modeling, video production), a leasing option may end up costing more than purchasing the software outright.
Pros & Cons of Buying Hardware/Software
Owned IT equipment is yours to implement where & how you need it. You never have to disrupt your network operations by pulling & returning it after 3 years.
If you're looking at IT equipment for long-term use (5+ years), you'll get more lifetime value from buying the equipment.
Over and Done.
Once you've paid for new IT hardware/software, you have it. No monthly bill to pay. You have peace of mind that you're set for another 3-5 years.
Buying servers, desktops, networking gear outright is an immediate out-of-pocket expense.
Since you own the hardware/software, you must maintain it. This is true for both leasing and buying, but when you own the hardware/software you have to pay to maintain it at the time of service. With leasing you could add a maintenance allowance to the lease and pay for it steadily over time.
Tax Incentives for Buying and Leasing
Section 179 enables a big savings by allowing a full tax write-off on business equipment purchases in the year they were purchased. This includes computers, software and office equipment. As of now, Section 179 is active for 2015 with a $25,000 limit and no bonus depreciation. Congress may vote to restore 179's bonus depreciation – they did in 2014 – but no date for this is known. Watch for an announcement at Section179.org
We consulted Brent Baxter, a partner at our favorite CPA firm Comyns, Smith, McCleary and Deaver LLP
, on the tax ramifications of the Buy vs. Lease choice and Section 179. Here's what they had to say.
- Tax Incentives for Buying: The tax write-offs of Section 179 apply to purchased equipment. If you buy new IT hardware/software, Section 179 lets you deduct their full purchase price during this tax year (up to the $25,000 limit). Not only does this soften the blow of up-front costs in the same year they are incurred, Section 179 creates an incentive to invest in new equipment.
- Tax Incentives for Leasing: Lease payments are deductible when paid.
Buying and Leasing versus the Cloud
Why even buy or lease hardware, when you can put your IT on the cloud?
It’s a fair question. But here are some considerations to keep in mind:
- Buying—it’s yours. With the hardware on-site, you have control over your data’s location & security. There is no decision on whether to re-up the lease in 3 years. On the other hand, you're responsible for sales tax & Business Property Tax on it every year (until it’s fully depreciated).
- Leasing is a midway point – you don’t own the hardware, but the hardware is present in your office/datacenter. You’ll pay sales tax & Business Property Tax as well; however, these are managed by the leasing agency.
- With leasing, returning hardware after 3-5 years means transferring software and data to new systems. Which could be an expensive undertaking, and may make simply re-upping your lease more appealing.
- Legal compliance is a major factor. Depending on your business’ operations, buying or leasing servers may satisfy legal compliance requirements better than cloud service.
- If you don’t have legal compliance requirements requiring on-site servers, a
may work great for you. One monthly fee and you never have to worry about purchasing hardware, maintenance, or securing a proper datacenter environment.
Weigh the Pros & Cons before Signing a Leasing Agreement
If it's time to consider some new IT hardware/software, you have options. Take a little time to weigh purchasing, cloud service and leasing.
As always, we’re happy to help all our customers figure out the best choice for your business.