time, the purchase option
frequently costs the least, especially in light of the tax advantages that can sometimes be gained. Under purchase, the organization takes title to the equipment. Of course, the money for the purchase must betaken from operating funds or borrowed. And, in a sense the organization is locked
into the system it purchases, since changing to a different computer system is more difficult either the system must be sold or arrangements must be negotiated to trade it in on a different computer. The organization must acquire its own maintenance services (for parts and labor, usually from the manufacturer,
and pay the monthly charges, which fluctuate from year to year. In addition, if the equipment was financed, payment on the loan must be made periodically. The cash outflow still maybe lower
than with renting or leasing, depending on the terms arranged by the purchaser. In return for the outgoing cash, purchase offers specific tax advantages
1. The monthly maintenance charges are deductible as a business expense.
2. Interest on any loan to finance the purchase is deductible as a business expense.
3. The cost of the equipment can be depreciated overtime this also lowers the taxable income and therefore the income taxes paid.
4. Local, state, and federal taxes paid on the purchase maybe deductible from income taxes. The purchase option indicates the use of depreciation to reduce taxes.
Ina sense then, depreciation deductions on income tax reduce the cost of the computer to the organization. Normally, this benefit is not possible under lease agreements and it is never feasible for short – term rentals. Of course, the tax benefits described apply only to firms that operate for profit. Nonprofit firms that do not pay income taxes thus do not receive tax benefits form computer purchase.
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