If you own a business, or are looking to start a businessin the USA you’ve probably considered taking out a lease. There are 37 million businesses in the USA and the majority of them use business leasing. A lease can be for a building from which you do business, like a shop, restaurant or an office. You can also lease equipment, like heavy machinery, ovens, computers, etc. Businesses are literally built on the ability to take out a lease. If you don’t lease, the upfront business costs are way heavier and in a lot of cases, unmanageable. Here we’ll look at benefits brought on by business leasing.
What Is A Business Lease
A business lease is an agreement between two parties, where one party agrees to rent or lease equipment or property to the other party for a specified period. The lease agreement outlines the terms and conditions of the lease, including the rental amount, the length of the lease, and the obligations of both parties. Business leases are commonly used for equipment such as vehicles, computers, or machinery, as well as for office or retail space. The benefits of a business lease include cost-effectiveness, flexibility, and reduced risk, making it a popular option for businesses of all sizes and industries.
How Are Business Leases Accounted For
There has recently been a shift with lease accounting standards after the release of the new accounting standard, ASC 842. ASC 842 was released by the FASB and applies to all businesses that draw up accounts in accordance with US GAAP. The new ASC 842guidelines stipulate that, essentially, all leases are drawn up on the balance sheet. Before, there could be off balance sheet items that could skew the valuation of a business. ASC 842 is easy to account for if you’re using accounting software.
Cost-Effective
Leasing can be a cost-effective option for businesses because it allows them to acquire equipment or property without the large upfront costs associated with purchasing it outright. Leasing often requires a lower initial payment and lower monthly payments than buying, allowing businesses to preserve their cash flow and invest it in other areas of the company.
Upgraded Equipment
Leasing provides businesses with access to the latest equipment and technology. Leasing companies are often incentivized to provide the newest equipment to their clients to ensure customer satisfaction. This means that businesses can avoid the cost of purchasing and maintaining outdated equipment while staying competitive in their industry.
Tax Benefits
Leasing can offer tax benefits for businesses. In most cases, lease payments can be written off as a business expense on tax returns, reducing a company's tax liability. Additionally, businesses may be able to deduct the entire cost of the lease payment in the year it is made. This is where the accounting once again becomes important with lease accounting under ASC 842. If that’s right, you’ll happily be able to reap the benefits but if the accounting under ASC 842 isn’t right, you might be incorrectly claiming these benefits. \
Flexibility
Leasing allows businesses to adjust their equipment or property needs as their business grows or changes. Businesses can add or remove equipment as needed without the hassle and expense of selling or purchasing new equipment. This flexibility allows businesses to stay agile and responsive to changes in the market and their industry.
This does depend on the contract in question. The contract needs to be fairly open ended to have the ability for flexibility to be included. But, once you’ve got a contract that suits, you’ll be far happier.
Reduced Risk
Leasing reduces the risk of owning equipment or property that may become obsolete or no longer useful in a short amount of time. The leasing company is responsible for disposing of the equipment at the end of the lease term, reducing the risk and cost to the business.
Improved Cash Flow
Leasing provides businesses with improved cash flow. Rather than paying a large sum upfront for equipment or property, businesses can spread the cost over the lease term. This allows businesses to invest their cash in other areas of the company, such as marketing, research and development, or hiring.
Leasing is a cost-effective, flexible, and low-risk option for businesses looking to acquire equipment or property. The benefits of leasing can help businesses improve their cash flow, reduce their tax liability, and stay competitive in their industry. If you are a business owner looking to expand your company's capabilities, leasing may be a great option for you.