How to best Finance the Office Furniture for your new Office in Orange County, Los Angeles County, Riverside County & San Diego County
Whether you are establishing a new business, expanding your old business or even scaling down during the current economic contraction, businesses still need Conference Tables, Reception Stations, Executive Desks, Ergonomic Chairs & Office Cubicles - Feel free to visit our Virtual Showroom at: http://www.caofficedesign.com.
The funding of these requirements is posing the most problems for both established as well as aspiring business owners. There are in essence two options:
- Buying: Two traditional methods of funding your office cubicles are using money from your business' daily cash flow (working capital) or borrowing the money from your bank. Unfortunately, these methods are not always feasible or desirable.
- Leasing: Leasing provides a practical method of acquisition without having to pay for it all at once. It preserves capital and provides flexibility but may cost you more in the long run.
Should your business lease or buy the furniture? The answer depends on your situation. Leasing office furniture or equipment can be a good option for business owners who have limited capital or who need equipment that must be upgraded every few years, while purchasing office furniture can be a better option for established businesses or for equipment that has a long usable life. Many experts recommend purchasing items that appreciate in value and leasing items that depreciate as they are utilized.
Each business is unique, however, and the decision to buy or lease office furniture or business equipment must be made on a case-by-case basis. Here's a look at both options.
Buying Office Furniture
Ownership and tax breaks make buying your office furniture appealing, but high initial costs mean this option isn't for everyone.
Advantages of Buying
Ownership: The most obvious advantage of buying office furniture is that you gain ownership of it. This is especially true when it is quality furniture that has a long useful life and is not likely to become technologically outdated in the near future.
Tax incentives: The recently enacted Economic Stimulus Plan extends the increased Section 179 expensing announced for 2009 to the end 2010. This includes small business equipment purchases, as well as a one-year 50% bonus depreciation allowance for new machine tools and other equipment ordered and placed in service during 2010.
- The boost in Section 179 expensing increases the amount that small businesses can write off for new and used equipment purchases in 2010 from the previous $128,000 to $250,000. Moreover, the cap on how much equipment can be purchased to enjoy the write-off has been increased from the current $510,000 to $800,000.
- The one-year 50% bonus depreciation means you can write off in 2009 or in 2010 an extra 50% of the cost of your new equipment that you buy and started using in 2009 or 2010.
- Let's assume that your company buys Office Furniture costing $100,000. Under the new 50% bonus depreciation, you can write off 57% of the Office Furniture in the first year, as opposed to only 14% had bonus depreciation not been enacted for the 2009 or 2010 tax years.
- Example of 50% BONUS DEPRECIATION:
- OLD LAW (pre-2008 change) - $100,000 Office Furniture Purchase
- 1st year Total Depreciation = 14% = $14,000
- NEW LAW $100,000 Office Furniture Purchase
- 1st year Bonus Deprecation: 50% of $100,000 = $50,000
- PLUS 14% regular depreciation on remaining property basis ($50,000) = $ 7,000
- TOTAL 2009 and 2010 Deduction on $100,000 machine = $57,000
- SECTION 179 BOOST FOR SMALL BUSINESSES:
- Under the new law, small businesses (whose total Office Furniture purchases in 2009 or 2010 don't exceed $800,000) can now ALSO expense the first $250,000 for the 2009 and 2010 tax years (until 1/1/2011). The 50% bonus depreciation can then be taken on the remaining basis of the machine, if it is new.
- OLD LAW (pre-2008 change) - $400,000 on New or Used Office Equipment Section
Sec. 179 Deduction = $128,000
PLUS 14% regular depreciation on remaining property basis ($272,000) = $ 38,080
TOTAL First-year Deduction = $166,080
- NEW LAW - $400,000 New or Used Office Furniture
Sec. 179 Deduction = $250,000
PLUS 50% Bonus Depreciation on remaining basis = $ 75,000
AND 14% on remaining 1st year basis of property = $ 10,500
TOTAL 2009 or 2010 Deduction on $400,000 new Office Furniture = $335,500
Total 2009 or 2010 Deduction on $400,000 used Office Furniture = $271,000
(Bonus Depreciation does not apply to used equipment)
- Examples assume customer is in 7-year asset depreciation class
That's 43% More ($43,000) in Tax Deduction for the 2009 or 2010 Office Furniture purchases!
Depreciation deduction: Some assets that don't qualify for the Section 179 deduction are real estate, inventory bought for resale, and property bought from a close relative.
Disadvantages of Buying Office Furniture
Higher initial expense: For some people, purchasing office furniture may not be an option, because the initial cash outlay is too high. Even if you plan on borrowing the money and making monthly payments, most banks require a down payment of around 20%. Borrowing money may also tie up lines of credit, and lenders may place restrictions on your future financial operations to ensure that you are able to repay your loan.
Getting stuck with old furniture: Although ownership is perhaps the biggest advantage to buying your office furniture, it can also be a disadvantage. Unless you purchase state of the art / quality furniture, you run the risk that it may become obsolete quickly, and you may be forced to reinvest in new furniture long before you had planned to. Used Office Furniture has very little resale value. A cubicle that you pay $2,000 today, for instance, may be worth only $200 or less three years from now.
Leasing Office Furniture
Leasing provides a practical method of acquisition without having to pay for it all at once. It preserves capital and provides flexibility but may cost you more in the long run. It is a good option for business owners who have limited capital or who need furniture that must be upgraded every few years.
Advantages of Leasing Office Furniture
Less initial expense: The primary advantage of leasing office furniture is that it allows you to acquire it with minimal initial expenditure. Because it normally requires only a small down payment, you can obtain the goods you need without significantly affecting your cash flow.
Tax deductible: Another financial benefit of leasing is that your lease payments can usually be deducted as business expenses on your tax return, reducing the net cost of your lease.
Flexible terms: In addition, leases are usually easier to obtain and have more flexible terms than loans for buying furniture. This can be a significant advantage if you have bad credit or need to negotiate a longer payment plan to lower your costs.
Easier to upgrade: Leasing also allows businesses to address the problem of obsolescence. If you use your lease to obtain items that may be outdated in a short period of time, a lease passes the burden of obsolescence onto the lessor. You are free to lease new, up to date furniture after your lease expires.
- Avoid depleting working capital of the business.
- Preserve bank lines of credit for business growth or other emergencies.
- Leased equipment pays for itself as it is utilized.
- Costs associated with a business lease are treated as a business expense.
- Leases can be fully tax deductible.
- Leasing protects against furniture obsolescence.
- Lease financing can be used for most capital acquisitions.
- Installation, service, maintenance, supplies, & other "soft costs" may also be included into a single, low monthly payment.
- Lease payments are treated as an off balance sheet item, strengthening the appearance of your company's net worth.
- Leases do not appear on your personal credit report.
Disadvantages of Leasing Office Furniture
Higher overall cost: Leasing an item is almost always more expensive than purchasing it. For example, a 3-year lease on a computer worth $4,000, at a standard rate of $40/month per $1,000, will cost you a total of $5,760. If you had bought it outright, you would have paid only $4,000.
You don't own it: In addition to the higher cost, you don't build equity in the equipment. Unless the equipment has become obsolete by the end of the lease, this lack of ownership is a significant disadvantage.
Obligation to pay for entire lease term: Another downside to leasing is that you are obligated to make payments for the entire lease period even if you stop using the equipment. Some leases give you the option to cancel the lease if your business changes direction and the equipment you leased is no longer necessary, but large early termination fees always apply.
The factors for deciding whether to buy or lease the Office Furniture requirements for your office in Anaheim, Costa Mesa, Huntington Beach, Newport Beach or Irvine are exactly the same as those in Los Angeles, Corona and Riverside, or even in Carlsbad, Rancho Bernardo & San Diego.
Most importantly, determine the approximate net cost of the new asset (including Delivery & Installation) and whether your cash flow can absorb the impact. Be sure to factor in tax breaks and resale value when making this calculation. After determining which option is more cost-effective, consider other intangibles such as the possibility that the product will become obsolete (if you are considering purchasing) or that your need for the product will expire before the lease does (if you are considering leasing).
Feel free to contact CA Office Furniture & Design (CFD) for a Free Consultation to help you determine your new Office Furniture requirements, as well as deciding on your best funding option. CFD offers both options and can assist with your financing decisions.
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