Generally it's not a great idea for a small owner operated business. As already noted, it's mainly a tax decision, and that sort of tax structure doesn't prove beneficial for small businesses.
I can offer you a bit of advice from my own experience, but it won't be applicable to your situation. The web isn't the best place to get financial advice. As already mentioned, a CPA is the way to go. A couple hours of their time can save you a lot of $$$.
First, I'll tell you about a company I worked for who leased everything. I mean everything! This was a top 100 engineering company in australia, with many divisions (civil, infrastructure, engineering, mining etc) and was publicly listed. I was working in a branch in the engineering division servicing the mining industry. We had 150 staff at our branch and turned over about $2mil/month. We leased all our vehicles, the building, every piece of furniture, plant, equipment (welders, compressors etc), all our workshop gear, even all our employees were basically leased because they were hired from labour hire companies and not directly by us. I wouldn't be surprised if we even leased our stationary.
The primary benefit was a tax benefit. All leasing costs can be recovered for tax purposes each quarter. Had we purchased equipment, that equipment would have been depreciated over time.... giving us a deferred tax asset which we may never been able to take advantage of if we didn't have future earnings. We could get greater tax deductions, sooner. The second benefit was that we didn't have to look after all that equipment. Storing, servicing, maintaining, tracking, repairing, deciding when to sell etc. It also neatly sidestepped the issue of needing to raise requests for capital expenditure, which is a loathesome maze in a large publicly listed company requiring much paperwork and report making. We could get a piece of gear, today, if we needed it.
As it turned out, it was probably a good call. The industry collapsed during the GFC (it's historically a boom and bust industry anyway) and we were able to return all the equipment, and scale our staff back to about 20 core people in the space of less than a month. A company setup like this is sort of an empty shell, but it's quickly scaleable. When the industry picked back up, the company scaled up again. It was an absurd scenario - we would often pay more to lease small plant than it would cost to purchase the same piece of plant! Like 3 or 4 times more, over a 12 month period. We would then lose, or damage the plant and have to pay to replace it. But under the rules, regulations and structure of large publicly listed corporations, those things are day to day expenses, and neatly tie in to tax affairs and reporting to shareholders. Expensive as they may be, they don't create a 'future mess'. It's all mess today, which is easier to handle.
Lots of the above benefits really don't apply to small businesses, who use their own money much of the time, have one person in charge, no shareholders, and not an enormous amount of taxable income. There are lots of other ways to reduce your tax liability. Small business owners make the mistake of getting into (inflexible) lease agreements because they don't have capital or credit to purchase equipment, but they want to have it. Overall, leasing is more expensive than buying. It also ties you into repayments which puts you in a tight spot if the market changes and you can't return the equipment.
Medium sized businesses often end up having to keep updating their equipment to get tax advantages. Depending on your turnover and taxable income, you may find that you can put more money in your pocket by borrowing to buy, purchasing new (or used), depreciating for tax purposes over a 3 year period then selling and borrowing to buy again. It gives you more working capital because you are borrowing instead of using your own money, and the interest is all deductable. You get the 1/3 tax deduction on depreciation each year which puts a lot of money that was going to the tax man back in your pocket. But it does create a cycle.
The sort of scenario that will work for you is very dependant on the structure of your company, your assets, turnover and taxable income. Get some advice from someone who really knows.
Shaun
