Which one of the following is NOT an advantage of leasing over purchasing?
A Avoids a costly one-time expenditure
B Offers a tax advantage to vendors
C May be more economical than an outright purchase
D Increase inventory turns
The correct answer and explanation is:
The correct answer is B: Offers a tax advantage to vendors.
Leasing typically offers several advantages over purchasing, but tax advantages for vendors are not one of them. Let’s break down the reasons why:
A. Avoids a costly one-time expenditure:
Leasing can help businesses avoid large upfront costs associated with purchasing expensive equipment or property. This allows a company to maintain cash flow, which is especially useful for businesses with limited capital or those looking to preserve liquidity for other investments. Leasing provides the benefit of spreading the cost of the asset over time, instead of requiring a single large payment at the point of purchase.
C. May be more economical than an outright purchase:
Leasing can be more economical in certain situations. For example, if the asset depreciates quickly or if the business only needs it for a short time, leasing can be a more cost-effective option. Additionally, leases often come with maintenance and repair packages that may help reduce the long-term costs associated with ownership.
D. Increase inventory turns:
Leasing can also help businesses manage their inventory more efficiently. When a company leases equipment or machinery instead of purchasing it, the leased assets are not tied up as long, allowing for faster inventory turnover. This may improve a business’s ability to adapt to changing market conditions by reducing the time and capital invested in obsolete or underutilized assets.
B. Offers a tax advantage to vendors:
This option is incorrect because leasing generally offers tax advantages to the lessee (the person or business leasing the asset), not the vendor (the person or business providing the asset). Lessees can typically deduct lease payments as business expenses, which can lower their taxable income. Vendors may benefit from the sale of the leased asset or through the interest charged on the lease, but they do not usually receive specific tax advantages directly related to the leasing arrangement.
Thus, leasing benefits businesses in terms of cost management, liquidity, and operational flexibility, but it does not provide direct tax advantages to the vendor.