lease to buy or bank finance

[kjm3232]

Hi everyone, my wife and i are considering buying a power trac and have posted this question at there forum and had gotten some decent responses but would like to hear from a larger group. we recieved the paperwork from the leasing company that power trac uses. (Tommorrow my wife will be calling the leasing company so they can help explain it better.) My questions are, after looking over the paperwork from the leasing company we can see it's an advantage if you already own a business for tax reasons. How is it an advantage for a regular homeowner who doesnt own a business? Or may open a business but it wont be until several years down the road? After the lease is up,we can purchase the machine outright for a dollar (which we are going to do). As a typical homeowner should we stick with a bank loan of some kind or use the leasing company? I know the big three usually offers some sort of financing thru them but has anyone else used a leasing company that doesn't own a business to buy a tractor? thanks in advance for your suggestions and guidance

 

[OrangeAlex]

I am no lawyer or accountant... all I know is basic Finance 101.

You are right.. you can only do tax depreciation on the tractor if you are using it for a business. This is like taking a loss against your business income because the tractor is losing value (depreciation) and your business is effectively lossing money on that piece of equipment it has invested in. It is effectively, an investment which losses money due to use. Eventually, the equipment is thought to be worth nothing from a tax point of view. This is helped along when the leasing company comes along at the end of the lease and takes the equipment away. You then lease a new tractor, and the whole cycle starts over again. It get a little ugly if you don't lease it but finance it and then try to sell the equipment after it has taken depreciation. This is because if you make money on the tractor at the time of sale, compared to its depreciated value, then you have to pay the goverment back for your "profit". This can get ugly. In addition, if you don't produce a profit in a few years of starting the business then you will be considered operating a hobby and that wont make the IRS very happy with you as you have been claiming a loss yet have never produce profit to be taxed against. The idea is the government will let you take a loss on capital investments as long as you can show you are using the equipment to make a profit and as a result will be paying your taxes on these profits. Giving the goverment more revenue. If you are not a business and don't want to have to do all the paperworks and show a profit then you should never lease. Always a bad idea because the amount of money you spend during the lease plus the "buy out" option at the end of the lease is always greater then what you would have paid to just finance it out right.

Hope this helps.