There comes a time in the life of any business when decisions must be made for selecting the telecom equipment that will best suit the needs of that business - now and for the foreseeable future.

During the research and decision-making phases, one question often arises: Should we buy or lease?

Early 20th century billionaire J. Paul Getty once suggested that one should “lease that which depreciates and buy that which appreciates.”

Since telecom equipment is a depreciating asset, and the underlying technology changes constantly, one could surmise that from a financial viewpoint leasing is preferably over buying.

From a cash flow perspective leasing does indeed offer the best opportunity for preserving working capital to be used for funding those expenses which cannot be defrayed.

How to Conduct a Lease vs. Buy Analysis

The best way to make your telecom equipment acquisition decision easier is to perform a Lease vs. Buy analysis. To do that successfully, you will need to consider a few key factors:

• The timing of the payment schedule vs. your monthly cash availability.The interest rate of the lease vs. the interest rate of borrowing the money to buy the equipment or technology.

• The interest rate of the lease vs. the loss of interest earned by not keeping the money invested.

• The tax benefits afforded by leasing vs. the tax ramifications of using a depreciation schedule. These figures must include any available investment tax credits which may accrue if you buy. (Your accountant will help you with this one!)

• The net cash outlay of the lease which is determined by subtracting the tax savings, if any, from the annual lease payment. Do this for every year of the lease.

Keep in mind that your net cash outlay also needs to be discounted to offset the effect of the time value of money. (Again, your accountant can be very helpful in helping you to understand the finer points here.)

Always attempt to determine the salvage value of the equipment after the lease expires. This is important because this number indicates the residual value of the asset after its useful lifespan. If the item has a high residual value, lease costs should be lower. (If it has a low residual value then the lease costs will be correspondingly higher.)

Tax Advantages of Leasing

Leasing also provides tax advantages in that the cost of the lease is usually deductible as an ordinary business expense in the year that is was incurred, while a purchase of a capital asset must usually be depreciated according to the applicable IRS tax schedule. (Your accountant will know what the limits are for determining when and how an asset must be depreciated, so be sure to check with him or her before you make any final commitments.)

In general, leasing provides a method for the organization to derive 100% of the benefit of the leased technology for a portion of its actual cost. That’s because leasing costs are calculated across the time that the equipment will be in service, and not the full price of the equipment or technology being leased.

But are these tax savings always beneficial? A big part of that answer depends upon three factors:

1. The cost of the item or technology being leased.

2. The expected usable lifetime of the item or technology being leased.

3. Other financial considerations including the cash position of the company considering the lease, the cost of money, and the advantages to the organization of having the extra cash available in their bank account to be used for other purposes.

Consider Leasing AND Purchasing

If you are considering replacing your current PBX with a virtual PBX and VOIP services, a case could be made for doing a bit of leasing AND a bit of buying.

It may make sense to lease the telephone handsets and routers, both as a hedge against feature creep as well as the benefit of being able to write off the costs rather than depreciate them; and it may also make sense to buy the software if you do not expect the technology to change so radically that it will be obsolete before you have realized a good return on the investment.

The case for buying the software becomes stronger if your vendor includes a reasonable upgrade path along with an affordable maintenance contract.

While analyzing each of these financial issues can help you reach the right decision, there simply be times when the lease vs. buy costs and benefits are close enough that the differences are negligible. In that case, use your gut instincts and forge ahead.