Objectives: Introduction Over View of System Analysis and Design
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- 10.4.5.3 Purchase
| 10.4.5.2 Lease As lease is a commitment to use a system fora specific time, generally from three to seven years. Payments are predetermined and do not change throughout the course of the lease. Depending on the terms of the lease, payments are monthly, quarterly, semiannual, or annual and include the cost of equipment service and maintenance. At the end of the lease period the lessor generally does not own the equipment. (If that is not the case, and the equipment becomes the property of the lessor, the Internal Revenue Service considers the agreement a conditional sale and the entire transaction must then be treated as a purchase) Compared with rental, leasing is less expensive. Because there is a longer commitment, the supplier will generally provide better service and the user can count of having the system available for use. Leasing protects against technical obsolescence, always a concern when purchasing computer equipment. If the lease term is short, the lessor can upgrade to a more powerful system even though the lease has not expired, providing the system is acquired form the same manufacturer. No capital investment is required to lease a computer system. Leasing offers specific tax advantages. In addition to deducting the cost of the lease as a business expense, tax credits are sometimes business pays. In some case, the title for the equipment can even be passed to the lessor. Legal assistance is needed to investigate the current terms and conditions allowed by the Internal Revenue Service at the time such a transaction is considered. 10.4.5.3 Purchase The ownership of computers through outright purchase is he most common method of computer acquisition and is increasing in popularity as lease costs rise. Over 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. Download 0.94 Mb. Share with your friends:
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