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Leasing Disadvantages

The disadvantages of leasing your equipment and other business assets include the following:

• Overall cost — the biggest disadvantage of leasing is that your costs over the life of the asset are generally going to be higher than if you purchased the asset. This is because your rental payments must compensate the lessor not only for acquisition and financing costs, but also for the lessor's retained risk of continuing ownership. Performing a thorough cash analysis is useful in estimating the actual cost differential between leasing and purchasing.
• No ownership interest — your lease payments generally do not establish any equity in your leased equipment. In other words, at the end of the lease you won't have a tangible asset to show for your payments. This can be especially painful if you've grossly underestimated what the equipment would be worth at the end of the lease. Negotiating a purchase option under which a portion of your lease payments are credited to the purchase price is one way to effectively create equity in leased property.
• Lost tax benefits — assuming that the IRS doesn't recharacterize your lease as a purchase for tax purposes, a potential disadvantage of leasing is losing the tax benefits of depreciation deductions that come with ownership. This disadvantage may be insignificant, however, if the "lost" benefits are offset by your ability to deduct your rental payments or if you have insufficient income or tax liability to be offset by the lost deductions and credits.
• Commitment to property — once you sign a lease agreement, you're generally committed to making payments for the entire lease period even if you stop using the property. Most equipment leases are either non-cancelable or impose a stiff penalty for early termination.