Is Leasing Really Worth It? 378
llamaluvr asks: "As I understand it, there are some financial benefits for businesses leasing hardware equipment. Does anybody know what exactly those are, and how much they really help? Do they really outweigh the additional costs of replacing, repackaging, and returning old hardware? How do the size of the business and the computing environment affect these benefits? Additionally, what is the best balance between leasing and purchasing equipment -- would leasing desktops and laptops, but purchasing monitors be best, or should one just lease everything?"
"A little bit of background: I work in the IT Operations department for a BU of a Fortune 100 company, and we lease practically everything right now. We have 4 full-time employees for about 800 workstations, and, while we seem to have enough manpower for managing projects and tickets, we have a tough time getting to returning the equipment, so a lot of it is already late. Complicating this is that many of these PCs are in a harsh industrial environment, and often have at least one failing part, which then costs us a fraction of the entire workstation (for example: a busted floppy might cost us $150 or more, unless we test the PC and replace the part, of course). Corporate has been more attentive to this drain on our time and money lately, and they have talked of outsourcing this process, but in the meantime, we're stuck with it. BTW, we lease IBM equipment through ePlus."
It's all about taxes (Score:4, Informative)
it's all in the taxes (Score:5, Informative)
With a lease you expense 100% of the amount you pay as soon as you pay it.
This is why a very common option is lease-to-buy with a very cheap buy option at the end of some number of years. This is essentially an apparently legal scam to allow you to write it all off. (It's legal because the leasor really does still own it until the end)
The next-best option is to sell the hardware the day you stop using it, because then you immediately get to write off the difference between the amount you've already devalued it and the amount you actually got for it. Because computers aren't worth anything much sooner than 7 years, you always get a tax benefit when you sell a computer that just became obsolete.
Finance Issue (Score:5, Informative)
Re:tax writeoff (Score:2, Informative)
With an asset, you are then able to depreciate the asset over it's "useful life", say 3 years. After 3 years you cannot depreciate the asset any more, and you still have an "asset". something else to consider when you own, is the cost associated with replacing the equipment. You just can't throw them in the garbage, they need to be "cleaned" and recycled.
Leasing on the other hand falls under "liabilities". All things being equal, more liabilities would make your Owners equity smaller (see equation above), thus resulting in a "smaller" bottom line, thus having to pay less taxes.
There are probably 1000's of other reasons out there as well.
Advantages of leasing (Score:5, Informative)
The advantages of leasing are primarily:
1. cash flow benefits
2. tax benefits
One of the primary things that small businesses (well, all businesses, but especially small businesses) have to manage is their cash on hand and their cash flow (when cash shows up, when it leaves) If I have to buy a $3000 server and I pay cash then I need to have $3000 cash right now and that cash goes away. If I lease that server, then I might have monthly payments of $50/month. Over the life of using the equipment I pay more, but at the outset I don't have to have all of that cash around.
Also, when you pay money to buy something of value, for tax purposes you don't take all of that cost off your profit immediately (you pay taxes on profits, not gross income) You have to depreciate it out over a period of time which is supposed to represent the useful life of the equipment. This means that while you might have paid the money out (in cash) you can't claim that they money has all gone away yet for tax purposes. Not fun!
When you lease an item the leasing company owns that capital expenditure and so they depreciate the item. Your monthly payments can be treated as expenses so they come off your taxable profits immediately. Plus you don't have to account for the depreciation, etc.
In my business most of my costs are salaries for my people, not workstations for them to use so workstation costs are a small fraction of my expenses. It makes sense just to buy a decent workstation outright rather than haggle with the lease people and try to return or buy out the eqipment later on. Other businesses will operate differently.
My $.02
Economy 101 for startup companies (Score:3, Informative)
Buying means spending more money to start with.
Borrowing money to buy instead of leasing would be the obvious choice IF the lender knows that you will succeed. If there is doubt about whether you will succeed with your new company, it will be very expensive to borrow the money to buy the stuff, and then leasing is cheaper.
That's it.
Lars Dybdahl.
Re:it's all in the taxes (Score:5, Informative)
(The rest of this is all massively, massively approximated. I am also not an accountant.)
Say you have an originally $1000 3 year old computer that's 60% depreciated If you keep it, you'll eventually get to write the other $400 (40%) off - over the next 4 years. This might save you $200 in taxes over those 4 years.
If you sell it for $2 you get to write off the rest of it immediately - so you immediately get $398 of writeoff and $2 - or $201 you've made, and it's all right now. This equation only gets better if you get more than $2 at the end.
This tax part basically hugely exaggerates or perhaps magnifies the "money now" part of a lease, especially if you can't guarantee that you'll immediately dispose of it.
So a lease for $400/yr for three years might be $200 after tax each year, while buying it is more like $850 the first year and then it gives you some money back each additional year.
Re:Assets and Lawsuits (Score:3, Informative)
Re:Leasing servers (Score:5, Informative)
In general, leasing of anything is optimal if:
A) The item has a long usable lifespan (i.e., damage from use is minimal) and low maintenance costs compared to purchase costs
B) The lessee only needs it for a short time
C) Item devaluation is minimal
Does this really describe your business model here?
An expensive leasing story from 1988 (Score:1, Informative)
TWR
Leasing sucks: Let the Bean Counters sort it out (Score:5, Informative)
Cashflow and nice looking books (Score:3, Informative)
In one year you can choose to spend, say, 1M on IT. Or you can spend 250K leasing it every year. That leaves 750K looking good on the books and can be used to invest in other money making opportunities.
Re:Leasing servers (Score:5, Informative)
leasing is a straight-forward writeoff for tax purposes while buying will involve amortizing the cost over multiple tax years.
Re:Terminal Server Setup (Score:2, Informative)
Leasing hardware (Score:5, Informative)
On the other hand, I wanted to change to leasing anyway. I time-phased the replacement schedule, so we replace 1/3 of our desktops/notebooks every year. For desktops, everyone getting new hardware every three years not only gives us a fair chance at keeping hardware fairly capable of running new software, it also cuts down on user complaints -- "They get new computers; we have to use old stuff!" Everyone knows that there's a three year cycle and when your turn comes up, you get new kit. It does also help with the disposal problem: our society is so saturated with cheap PCs that most charities, schools, and non-profits don't want old stuff. I'm willing to sell (or give, depending,) obsolete stuff to new employees but that hasn't worked terribly well in the past. Too many folks want too much support -- "Can I put a wireless network card in this old computer? What can I do to make it run this game my son bought?" -- that sort of thing. A few employees try to take advantage -- "You sold me this computer and it won't
A downside is that for most leasing companies, you have to keep the original packaging material to ship the stuff back to them three years down the road. Never underestimate how much space all those boxes are going to use up, not to mention the time you'll spend trying to match PCs, monitors, laptops, etc. to their proper box.
For servers, it means we get new servers every three years, which means that I don't have to hugely overspec the thing when I buy it in the hopes it will prove useful more than three years down the road. It also means that it gets complicated if you decide a year later that you need more memory or additional processors. The leases won't end at the same time or you buy it and end up with a box of useless kit when you return the server. It also means that for better or for worse you're going to end up doing server replacements (and all that entails, time-wise,) every three years. We time-phased this, too, so not everything gets replaced at the same time.
We recently decided to go with five year leases on the servers. The rate of cycle-eating inflation with applications hasn't been too severe lately, so we think that even if it won't be top-of-the-line three or four years down the road, we can still find something it can do. For example, if the new one gets too slow running the database, maybe it could host a different application, or a set of aplications known to play well together when hosted on the same box.
On the whole, after three years (one full cycle,) of leasing, I prefer it over buying. I spend a lot less time worrying that I'm buying too little hardware for my needs down the road and we're saving capital for other uses. I don't worry about what to do with older equipment any more and I know that when the manufacturer's warranty runs out, the hardware goes away and is replaced by new stuff with new warranties. As a smaller organization with limited resources, our little group hasn't spent noticable time on hardware issues for the past three years and that's a good thing.
Rb
Re:tax writeoff (Score:2, Informative)
Why are you asking Slashdot? (Score:3, Informative)
Every business is different -- ask a professional what is best for your business. That's what you pay them for...
-ch
It's about CASH people (Score:3, Informative)
Re:Leasing servers (Score:5, Informative)
At the end of the lease an asset has residual value. That residual value is determined when you execute the lease. The benefit of leasing comes when the asset has a high residual value; thus the lease payments can be viewed as a loan of sorts, a loan for the difference between the purchase price and the residual value.
For example, if the purcahse price of a server is $10,000, and its residual value after 3 years is $2,500, then the lease is effectively a loan for $7,500, repaid over 3 years. Thus, if you intend to refresh the server after 3 years, you get use of the server for 3 years for $7,500 (plus interest); whereas a purchase of the device would ential use of the server for 3 years for the cost of $10,000 (plus either interest or "the cost of money") and less what you manage to sell it for.
The potential gain from leasing must then be compared with the overhead associated with maintianing an organisation that tracks down and returns assets ON TIME; since late fees detract from the benefit.
There are also non-traditional reasons for leasing. In a former job my boss introduced the leasing of all servers and desktops, where the lease costs were paid by Corporate IT (instead of each department's budget). This allowed Corporate IT to standardise the hardware configurations, and enforce regular refresh of assets, where old assets did not hang around for extended periods of time consuming software licenses and support.
Re:Benefits of leasing (Score:2, Informative)
At least it was in my experience, running a much smaller company than the one cited by the orginal poster. We had a couple dozen machines, servers, monitors and assorted perpherials, all leased.
We went belly-up during the dotcom bust. At first we thought, we just stop making the monthly payments (important since our revenue was minimal) and we just return the equipment, right?
Nope. That didn't work. See, the leasing contracts did not have a voluntary termination clause. In other words, we were LOCKED into them.
They were less like leases and more like loans....Loans where we got nothing at the end of the term! That is, unless you count the right to buy the equipment at 10% on the dollar or some other "very cheap" price once we were done paying them off.
So we got stuck with large $$$ settlements with these lease (aka loan) companies, in order to get out of the leases, just as if they were credit card companies.
Moral of the story: Read the fine print and pay with cash!
--
Another self-referential, manually-generated SIG.
Rule of Thumb (Score:3, Informative)
Every product you buy has an estimated replacement lifespan. Computers, for example, get to be about 3 years old before people tend to replace them. The cost of leases are usually calculated using this estimated lifespan.
If you are going to use a product for LESS THAN 75% of it's replacement lifespan (switch computers every 2 years), you are better off leasing. Anything longer than that, and you're probably better off buying.
Please note that the replacement lifespan is quite different than the actual product lifespan (Computers working 8+ years, etc).
~D
Falacy (Score:3, Informative)
Establish long lasting relationships with large systems integrators and builders such as HP, IBM or SUN. Work with your vendors to get a solution that matches your requirements.
Then, hold your vendor to the agreement. If your not getting what you need, call your sales rep. Call the VP of customer relations/support for the company. Talk to the money people rather than the technical people if you are not getting support. It will get fixed, and quick too.
Re:Assets and Lawsuits (Score:3, Informative)
If the companies in the chain appear to exist for the sole purpose of doing business with each other, you gain precisely zero protection except for a certain sense of self-satisfaction for making things more complex than they need to be.
Yes, this is done all the time, but no, it does not afford the protection people think it does. Now, if each company does some TINY percentage of its business with one of the others, you might succeed. But if you are your only customer...it ain't happening.
People used to try to do this with their personal assets. They'd set up a holding company that would then purchase and lease back all of their stuff and existed soley for that purpose. The IRS is quite aware of how clever people think they are for setting up these paper companies and does not take kindly to them.
Anyone who does this sort of crap and then bitches about the tax code being insanely complex can thank themselves for dreaming up all these schemes, which then require endless legislation to clarify their absurdity.
Re:Leasing servers (Score:5, Informative)
As all things, the answer is "It depends".
I'm a fan of the $1 buyout lease, for tax purposes this is the same as buying. If the lease is structured more in line with a FMV (Fair Market Value) buyout, it would usually not be treated as such, and the leasing company would take the write off (helpful for a start up that won't be making a profit and thus makes no use of the tax write off, since the leasing company IS profitable and thus can bundle the tax savings into the payment
Another potential benefit is in the company books. Since the company doesn't OWN the equipment, it doesn't show up as an asset, and since it can be treated as a monthly "service", the debt doesn't have to be disclosed on the books like a loan would.
Re:Leasing servers (Score:4, Informative)
Generally, when you purchase something, it goes down in your books at cost, and stays at the value you purchased it at. Another account keeps track of the depreciation - it's calculated differently depending on what it is, but generally it's a curve. The lowest spot on the curve is at the end of useful life, when the value recorded for the machine minus the depreciation is the amount you've estimated you can salvage it for.
If you're buying a piece of equipment at the end of a lease, it's the same thing. You move it into an asset account at the value of what you purchased it for, and start depreciating it. The main difference here is that you're probably only going to have the machine for a short time, so your depreciation is very fast.
Bear in mind that to people who don't work with accounting methods, they don't make any sense. It's all based on 14th century financial theories and it takes some training to figure out exactly what's what. The methods are standardized though, so it's always roughly the same for every company (barring international differences).
Leasing is NOT worth it. (Score:4, Informative)
Re:Leasing servers (Score:5, Informative)
- the lease term is greater than 75% of the property's estimated economic life
- the lease contains an option to purchase the property for less than fair market value
- ownership of the property is transferred to the lessee at the end of the lease term
- the present value of the lease payments exceeds 90% of the fair market value of the property
If none of these conditions are met, the lease is an operating lease, which means that the payments are expensed when they are made.If the company exercises a purchase option at the end of an operating (expensed) lease, the lease-end purchase price is capitalized and amortized over the remaining useful life of the asset; it has no effect on the original classification of the lease. I don't remember the rule regarding an exercised purchase option at the end of a capital lease (it's been a long time since I had to know this). FASB Statement 13 [fasb.org] covers this in excruciating detail if you really want to know more, but beware of all the interpretations and amendments [fasb.org]...
Nonsense (Score:3, Informative)
Also, if you were to lease refurbished equipment, why wouldn't you reformat the system from scratch with the latest software, etc. Heck, why don't you do this with NEW equipment? God only knows how long its been sitting in a box on the shelf?
True, it won't have any fancy warranties, but as downtime is the most expensive part of any IT operation, fancy warranties that companies rarely honor anyway are of little value.
You should be working with reputable vendors, not fly by night whitebox assemblers operating out of Pakistan. All my critical equipment is covered under 4 hour response warranties, and once I've identifie dthe problem I usually have a replacement part on site in 2 hours. The only exception I've had is during a hurricane when the part had to be sent from a remote fulfillment center, then it took 6 hours. Something tells me you're an order the parts and build it yourself guy, useful for making your clients dependant on you I guess, but not much else.
Relevant Article (Score:4, Informative)
In short, they found that if you want to turn over your computers frequently and on schedule, and were good at asset managment, leasing was generally favorable. But if you decide you want to turn them over ahead of schedule, make changes to the systems during their use (like add memory), or aren't amazing at tracking assets, then the administrative burden could be really heavy.
They also had a neat description of a procurement system that facilitated the vendor bidding process.
Overall, the article is a nice balanced look at the topic.
Re:it's all in the taxes (Score:3, Informative)
: The important bit is: money now is a lot better than money later ... This is what "Return on
Investment (ROI)" is all about
Actually this is "Discounted Cash Flow". Its part of ROI but ROI is more than you need to compare alternative payment plans.
Plus money now is better than money later if you are receiving it. If you are spending it the opposite is true.
A couple of things to be careful of.
Unrealistic residual values can bight you depending upon the terms of the lease. If you have to guarantee the residual value and its too high you end up paying the lessor an unexpected sum at the end of the contract. This is a technique used by unscrupulous operators to con people.
If its too low and you get to own the equipment at end of lease, you may up with taxable profit on the difference.
For vehicles be very careful about the mileage allowance. These contracts sometimes contain unrealistically low mileage allowances and high per mile penalties if you exceed them. What looks like a good deal ends up being horribly expensive.
Tax tricks. (Score:3, Informative)
Re:It's all about taxes (Score:3, Informative)
My PC is $151/mo for three years ($5436 over the lease), but was ~$3000 from the manufacturer (the government price would have been even less). This is on top of monthly charges for support ($135/mo), email ($19/mo), network access ($34/mo), calendaring ($7.50/mo), manditory external file storage ($40/mo). All of these charges are out in the open and anyone who can multiply can see how bad the government is getting ripped off.... but no one in power at NASA seems to care.
We recently tried to order a Mac mini from LMIT for outright purchase (the lease contract requires us to buy all systems from LMIT) and they tried to charge us $1600!!
And the support is so abysmal that most of us find coworkers to fix our systems rather than call the help desk (and risk having the problem made worse).
All of this was once in-house, but congress pushed for privatization.... and this mess is what happened.