Seattle Small Business Blog

You are starting or expanding your business – great! But you are looking at many more demands on your finances: office equipment, tools, furniture, computers and peripherals, vehicles, etc. Deciding whether to buy or lease what you need might seem overwhelming.

Leasing is tempting to many, as it requires less cash up front. Having enough cash is essential for survival when beginning or expanding your business, as you will also need to invest in many intangibles such as marketing, licensing, or hiring help. But, leasing usually costs more in the long run, often quite a bit more, and you are normally committed to a contracted time period. There are advantages and disadvantages to both.

Let’s look at some of the pros and cons:

Some Advantages of Leasing:

1. Lower Costs at Start-Up

Few businesses have “more than enough” cash on hand, especially when just beginning or expanding. Lower start-up costs can give you more time to get settled into the marketplace and get the word out about your products and services, giving you a much better chance of surviving those risky first years. You can get a lot more for a lot less immediate expenditure by leasing. Buying 20 computers will cost you thousands of dollars; leasing 20 computers may only run you a few hundred dollars per month.

2. Support and Maintenance

Leased equipment usually includes ongoing support, maintenance, upgrading, and possibly even training for you and your staff. You can even “lease” your business management software and services by way of online subscription. This can enable even the smallest business to have the latest software versions automatically provided, and support staff on-call in the event of trouble. (You might be amazed to learn how much time is lost and headaches created in many small businesses by confusing and challenging management and record keeping software and systems.) With hardware, it is far easier, for example, to call the lessor and have a broken copier replaced immediately than to wait for the repair serviceman for your purchased copier, wait out the downtime, and then face the bill for his services.

3. Flexibility

When you buy something, even if your needs change or better technology becomes available, your investment is tied up in the purchased item. Leasing may allow you to update or replace your equipment or furniture when you need to, or even get rid of the commitment if you no longer need the item.

4. Tax Advantage

Most lease payments can be fully deducted in the year you paid them, whereas major equipment purchases may have to be depreciated over several years. Since your money will likely be tighter in the beginning months and years of your business, the ability to offset lease expenses against your initial investments may help you greatly at tax time.

Some Advantages of Buying Equipment and Supplies Outright:

1. Lower Lifetime Costs

Many things will cost you far less in total if you purchase them outright rather than leasing. You might pay $300 for an ergonomic desk chair that will serve you well for many years. The same chair, if leased, might run you $30 per month. You would then be paying $360 per year for the leased chair.

2. Lower Monthly Overhead

When you lease, you must pay the lessor on time, regardless of the level of cash on hand. If the income of your business varies widely from month to month, you can choose to only purchase equipment when you have the cash on hand and you will have fewer problems meeting your monthly budget.

3. Assets Rather than Liabilities

What you buy outright becomes an asset of your business, and so enhances your “bottom line.” Lease payments, on the other hand, qualify as liabilities, and so lower your company’s value. This may be important if you need to get a business loan or decide to sell your business. If you move or go out of business, your assets may be sold or taken with you, but it may be much harder to dispose of your lease contracts.

4. Tax Advantage

Since the IRS allows you to deduct a large amount of your business purchases from your gross income, if you are having a good year you may save significantly more by purchasing outright rather than leasing.

So, obviously there are pros and cons of buying as well as leasing. Here are some tips to help you make the best decision:

* Leases are best for more expensive items, and cash purchases for less expensive items. Lower cost items can usually be afforded from income on hand, but it may not be advisable to deplete your funds to make larger purchases. If you lease the larger items, you can budget to save and purchase your own later, and still have management and promotion funds available now.

* Check with your tax advisor. Find out the financial and tax implications of leasing versus buying for your individual situation.

* Last but certainly not least, don’t be tempted to buy what you don’t really need. If you are just getting started, use thrift-shop desks and other furniture, settle for a good telephone with answering machine rather than the full inter-office network being promoted, and watch for office or industrial close-out sales or auctions, where you can buy still-serviceable supplies for pennies on the dollar. If your company is to grow and thrive, cash in the bank is worth much more than beautiful furniture or the latest techno-marvel.

Accounting is all about numbers. These numbers are collected , summarized and analyzed before creating reports and statements. This is then distributed to management and even stockholders. It takes time to put all these numbers in order which is why an accounting software is often used for this purpose.

The advantage of using an accounting software for starters is that you can reduce the time needed to collate data so you know almost immediately if the business is making money or not.

Another advantage of using an accounting program is that aside from being fast, it is as accurate as the information you put into it. The best part about accounting software is the fact that you only pay once in order to get the whole package. This saves you money as accountants will charge a professional fee each time you require them to do a particular task.

Most accounting programs in the market are easy to use, set up and navigate. This means you don’t have to be a certified accountant to use it. Generally, you are given a step by step guide that will help you throughout the entire process.

There are a few things to look out for when you decide to invest in an accounting software. First, this should be reliable. Some software programs look good in the beginning but then fail to deliver later on.

You can talk with other companies that are in the same industry you are in to find out what software they are using. Since these software programs are sold more openly in the web, you should get in touch with current users to see how well it has performed or read reviews written by various organizations that spend time browsing through the program.

Although accounting uses the basics of mathematics, there is more to it than that especially when various sheets are compiled together. You can ask for a 30 day trial period to see if this is what you need. Should the features and all the numbers come back with the same results, then you know it is worth buying.

If it has a lot of features that you don’t need, you should just look elsewhere and get the kind that suits your needs. There are various ones in the market like those used for payroll or to compute for taxes so you should focus only on what you need.

The last thing to consider is the price. Given that you know what features you are after, you don’t even have to buy the most expensive one in the market. Compare prices. There are cheaper packages that can perform just as well.

Reliability, features and price are the three most important things to look for when you decide to purchase an accounting software for your company or organization.

Are you planning for retirement? If you’re not doing any planning, then you should be. Retirement is lasting much longer today than it did for the retiring generation 20 or 30 years ago. You now could have 30 or more years to provide for in your retirement, which is a considerable amount of time compared to your working life, which may have been 50 years or less. Government pensions are not going to do anything but provide you with the bare necessities of life — a bleak outlook for the vast majority of retirees.

It doesn’t have to be that way if you implement a bit of prior planning. The problem is that most people like to live for the moment and get swept away buying the latest gadgets and technological wonders. There’s so much to spend their money on that it’s extremely difficult to put a little money aside for retirement. Suddenly the big “six-oh” looms up, retirement is almost upon you, and nothing has been planned.

Younger people can learn from the mistakes of their elders and use the help of innumerable resources, including online and community sources, and/or private investment advisors. In fact, investment advisors are a great help, but be sure to choose a reputable one. There have been too many stories of people losing their life savings from taking bad advice, or worse still, being completely fleeced by disreputable advisors. So always do your due diligence.

There are many ways to save for your retirement, from government subsidized programs to employee pension plans. You can invest in real estate or put your money into blue chip stocks. But keep away from speculative investing. This money needs to be safe and should be in a variety of vehicles, so that if one investment fails you don’t lose everything.

One common “alternative” to retirement planning is to have a good time while you’re young and have the money, and then live on the bread line when you retire. Some people see plenty of sense in this approach when they’re young, but then panic as reality sets in later in life.

If you are lucky enough to own a house, then you at least have a life line. You can sell the house and buy something cheaper. You could go live with your kids. You could even rent a mobile home to live in. If you do sell the house and free up your equity, then you can use some of this money to live on and spread the rest around in some decent investments to bring in a little extra income.

Think about your retirement now and decide how you would like to live when you reach that stage in life. Start to plan for retirement now. Do not leave it any longer. It could soon be too late.

In any small/home business you definitely have more tax advantages than if you were simply an “independent contractor” or “sole proprietor” claiming the income on your personal 1040 tax return. The tax advantages become substantial when you consider how you can improve the profitability of your home business by filing a separate Schedule C for your business income and declaring all of the deductions you are entitled to.

You may be missing some very important deductions. You must itemize your deductions for your home business operation on a separate schedule just as you would for your personal deductions. Knowing which deductions you are entitled to can save your home business hundreds of dollars a year.

Here is some background information on how your income tax amount is arrived at by the IRS.

The U.S. taxation code states that almost all income is subject to federal income tax. The way that you, as the owner of your home business, arrive at the final amount of income tax is as follows:

Gross Income – (All Expenses + Miscellaneous Deductions + Depreciation on Assets) = Taxable Income

Taxable Income x (Your Tax Rate) = Income tax for the fiscal year

Here is a quick definition of the terms in the above taxation equation:

Gross Income: The total of all income for the year after the cost of inventory has been accounted for.

Expenses: All costs of doing business during the fiscal tax year. Examples include payroll, materials, supplies, interest on business loans, etc. To find out if an expense qualifies as a legitimate business expense, consult your accountant or the IRS.

Depreciation: This is a way of spreading out the deductibility of an asset over a period of more than one year. This is done for assets like real estate, equipment and other assets with a long economic life. This method of taxation write-off has certain advantages. Be sure to talk to your accountant regarding proper depreciation rules. The IRS has different depreciation schedules for different business property. These rules are subject to change by Congress and the IRS.

Miscellaneous Deductions: This is an often misunderstood and overlooked way to save a lot of money on taxes. Remember that these types of expenses must be totaled up and declared on a separate schedule of your income tax forms. Always track your expenses and be sure to save at least one copy of every deduction. You will be asked for proof of every transaction that is declared as a deduction if you are audited by the IRS!

Here is a list of some of the most common business related expenses you can deduct from your income taxes:

1. Airfare
2. Auto Expenses
3. Books and Magazines
4. Educational Expenses
5. Home Office Space* + a portion of Utilities, Telephone, and Maintenance Costs
6. Office Furniture
7. Cleaning Expenses
8. Meals with Business Clients
9. Laundry Expenses (when traveling)
10. Advertising
11. Bank Fees and Interest
12. Licenses and Regulatory Fees

* If you own your home you must use the IRS depreciation rules to determine this deduction. If you rent, you may also deduct a portion of your rent.

Check IRS Publication 535 or contact me to schedule a consultation to find out if you can deduct any or all of the above.

As you can see, there are many deductions that are allowable for your home business. The best way to get more information on tax deductions and related information on income taxes is to go online to http://www.irs.gov. There you will find a helpful search engine containing thousands of government publications that you can research and print out if you need to.

Now you have a good idea of the deductions you are entitled to take. So do your research, keep track of your expenses and take all of the deductions you can for maximum profit every year.