Another downside to leasing is that you are obligated to make payments for the entire lease period even if you stop using the equipment. Some leases give you the option to cancel the lease if your business changes directions and the equipment you leased is no longer necessary, but large early termination fees always apply.

Buying Equipment

Ownership and tax breaks make buying business equipment appealing, but high initial costs mean this option isn't for everyone.

Advantages of Buying Equipment

The most obvious advantage of buying business equipment is that, after you purchase the equipment, you gain ownership of it. This is especially true when the property has a long useful life and is not likely to become technologically outdated in the near future, such as office furniture or farm machinery.

Tax incentives are another good reason to consider purchasing business equipment. Section 179 of the Internal Revenue Code allows you to fully deduct the cost of some newly purchased assets in the first year. In 2006, you can deduct up to $108,000 of equipment (subject to a phase-out if you placed more than $430,000 of equipment in service in any one year). For example, if you are in the 25% tax bracket and you purchase $100,000 in business equipment this year, the net cost to you is only $75,000.

Although not all equipment purchases are eligible for Section 179 treatment, you can still receive tax savings for almost any business equipment through depreciation deductions. (Some assets that don't qualify for the Section 179 deduction are real estate, inventory bought for resale, and property bought from a close relative.)

Disadvantages of Buying Equipment

For some people, purchasing business equipment may not be an option, because the initial cash outlay is too high. Even if you plan on borrowing the money and making monthly payments, most banks require a down payment of around 20%. Borrowing money may also tie up lines of credit, and lenders may place restrictions on your future financial operations to ensure that you are able to repay your loan.