Renting vs. Owning Business Equipment

Most businesses require equipment of some sort, whether it is office equipment such as furniture, computers, printers, and faxes; cars or trucks; or heavy machinery. As a business owner, you have to make a decision about how you want to get this equipment: whether you want to rent it or buy it outright.

In general, your decision probably depends primarily on how often you will need the equipment. If it is vital to the operation of your business, the cost of renting the equipment would be too high, and an outright purchase would make sense. However, if the equipment is only needed every once in a while, the expense of purchasing the equipment would not be cost effective, so renting is probably the better option.

For instance, say you sell landscaping materials such as fertilizer, topsoil, and pea gravel. Equipment such as compost screens, gravel screening machines, and topsoil screening machines will be a necessity to your business, so you should probably plan on owning the equipment. On the other hand, if you a gardener and only do minor landscaping work, you may only need a screening machine every once in a while. In the latter case, renting the machine probably makes the most sense.

The Difference between Depreciation and Amortization

If you are a freelancer or small business owner, you have probably noticed a tax form for reporting business equipment called Depreciation and Amortization. But what exactly does this mean?

Basically, when you invest in a piece of equipment, real estate, or other property for you business, the IRS is assuming that it is only going to last a certain amount of time (depreciation). Therefore for more expensive items, the expense is spread out over the life of the item (amortization). Therefore the shorter an item's life (for tax purposes), the more of a deduction you get to claim on it each year.

Deciding the length of your property's life is the tricky part. Cost segmentation services can help you determine the shortest possible lifespan of your property, therefore accelerating the depreciation. This process, also known as cost segregation or just cost seg, allows you to amortize the expense over a shorter period of time, maximizing your deductions as much as possible — and thereby lowering your net income each year.

Understanding depreciation and amortization is an important part of minimizing the income taxes for a small business owner or freelancer — but even the most financially savvy business owner can't know all the ins and outs of classifying business equipment and property. Therefore you will probably benefit greatly from hiring someone to handle this for you.