The disadvantages of leasing your equipment and other business assets include
- Overall cost — the biggest disadvantage of leasing is that your
costs over the life of the asset are generally going to be higher than if
you purchased the asset. This is because your rental payments must
compensate the lessor not only for acquisition and financing costs, but also
for the lessor's retained risk of continuing ownership. Performing a
analysis is useful in estimating the actual cost differential between
leasing and purchasing.
- No ownership interest — your lease payments generally do not
establish any equity in your leased equipment. In other words, at the end of
the lease you won't have a tangible asset to show for your payments. This
can be especially painful if you've grossly underestimated what the
equipment would be worth at the end of the lease. Negotiating a purchase
option under which a portion of your lease payments are credited to the
purchase price is one way to effectively create equity in leased property.
- Lost tax benefits — assuming that the IRS doesn't recharacterize
your lease as a purchase for tax purposes, a potential disadvantage of
leasing is losing the tax benefits of depreciation deductions that come with
ownership. This disadvantage may be insignificant, however, if the
"lost" benefits are offset by your ability to deduct your rental
payments or if you have insufficient income or tax liability to be offset by
the lost deductions and credits.
- Commitment to property — once you sign a lease agreement, you're
generally committed to making payments for the entire lease period even if
you stop using the property. Most equipment leases are either non-cancelable
or impose a stiff penalty for early termination.