Every year, businesses collectively make billions of dollars of equipment decisions that come down to one question: should we lease it or buy it?
The answer depends on your tax situation, your cash position, how long you'll use the equipment, and what the lender actually offers you. Here's how to work through it.
The Core Tradeoff
Buying — whether outright or through a loan — transfers ownership to you. You own the asset, it goes on your balance sheet, and you bear the risk of obsolescence and maintenance. The upside: tax deductions can be front-loaded through Section 179, and you keep residual value when you eventually sell or trade in.
Leasing — particularly an operating lease — is closer to renting. You make monthly payments, use the equipment, and return it at the end of the term (or buy it out at residual value). You don't own it, but you also don't have the depreciation risk. Payments are 100% deductible as operating expenses.
Neither is inherently better. What matters is the after-tax cost to your business.
The Section 179 Advantage for Buyers
Section 179 is a federal tax provision that allows businesses to deduct the full purchase price of qualifying equipment in the year it's placed in service — rather than depreciating it over 5–7 years as you would under standard MACRS rules.
For 2024, the Section 179 deduction limit is $1,160,000, which covers virtually all small business equipment purchases. Qualifying property includes:
- Machinery and heavy equipment
- Business vehicles (with limits for passenger vehicles)
- Computers and off-the-shelf software
- Office furniture and equipment
- Certain qualified improvement property
The tax impact is immediate: if you're in the 21% corporate tax bracket and buy a $100,000 piece of equipment, Section 179 saves you $21,000 in taxes in year 1. That's real cash that reduces your effective purchase cost.
Important caveat: Section 179 only applies if your business has taxable income to deduct against. If you're expecting a loss year, you may not be able to use the full deduction immediately (though you can carry it forward).
The Lease Deduction Advantage
Lease payments are deductible too — but differently. Instead of one large year-1 deduction, you get a smaller deduction spread across the lease term.
For a 60-month lease at $1,400/month on equipment with a 21% tax bracket:
- Annual lease deduction: $16,800
- Annual tax savings: $3,528
- Total tax savings over 5 years: $17,640
Compare that to buying the same equipment for $75,000 with Section 179:
- Year-1 deduction: $75,000
- Year-1 tax savings: $15,750
The buyer captures most of the tax benefit immediately. The lessee spreads it out.
Cash Flow vs. Total Cost
Leasing typically requires less upfront cash — sometimes just a first and last month's payment. Buying usually requires 10–20% down or more.
If cash is tight, the lower barrier to entry on a lease can be decisive — even if the lease costs more over time. Preserving working capital has real value.
If cash isn't a constraint, the total cost comparison matters more:
Example: $75,000 piece of equipment
| Buy (7.5%, 5-yr loan) | Lease ($1,400/mo, 60 months) | |
|---|---|---|
| Total payments | ~$90,000 | $84,000 |
| Tax savings | ~$15,750 (Section 179) | ~$17,640 (monthly deductions) |
| Residual value | Own the asset | Nothing (or residual buyout) |
| Net cost (before residual) | ~$74,250 | ~$66,360 |
In this scenario the lease looks cheaper in net cost — but the buyer owns an asset that might be worth $20,000–$30,000 at end of term. Factor in residual value and buying wins.
The Equipment Lease vs. Buy Calculator lets you model this with your actual numbers.
When Leasing Makes More Sense
- Technology equipment that becomes obsolete quickly (computers, servers, POS systems) — leasing lets you upgrade at end of term without being stuck with outdated assets
- Uncertain usage period — if you're not sure how long you'll need the equipment, a lease avoids the risk of owning something you don't need
- Preserving credit capacity — operating leases may keep debt off your balance sheet (depending on accounting treatment), preserving your borrowing capacity for other needs
- Tight upfront cash — lower initial outlay with a lease keeps working capital available
When Buying Makes More Sense
- Long-term use — if you'll use the equipment for 10+ years, buying is almost always cheaper
- High residual value — some equipment holds value well (certain vehicles, specialized machinery); owning it captures that upside
- Strong Section 179 opportunity — if you have significant taxable income this year, front-loading the deduction can be very valuable
- Customization needed — leased equipment is usually returned as-is; owned equipment can be modified to your specifications
What About Financing vs. a Capital Lease?
Equipment loans (financing the purchase) and capital leases are economically similar — both result in ownership at the end of the term (or at buyout). Operating leases are the ones where you return the equipment.
When comparing options from dealers or equipment finance companies, make sure you're comparing:
- True annual percentage rate (APR), not just monthly payment
- Any residual or balloon payment due at the end
- Maintenance and insurance requirements (often required in leases, often optional in loans)
- Early termination penalties
A Practical Checklist
Before deciding, answer these questions:
- How long will we actually use this equipment?
- Does this equipment have high obsolescence risk?
- Do we have taxable income this year to use Section 179?
- What's our current cash position and available working capital?
- What's our existing debt load — does another loan affect our DSCR?
- What's the actual total cost (not just monthly payment) for each option?
The right answer depends on your numbers, not a general rule. Run the comparison, model your tax situation, and make the decision that minimizes real after-tax cost — not the one with the lowest monthly payment.