Introduction

Deciding whether to finance or lease equipment is a common strategic decision for business owners. Both options let you acquire needed assets, but they differ in cash outlay, tax treatment, balance-sheet impact, and long-term cost. This guide walks through tax rules current in 2025, cash-flow tradeoffs, accounting effects, practical examples, and a decision checklist you can use with your tax advisor.

How financing and leasing differ in everyday terms

  • Equipment financing (loan): You borrow money to buy the equipment. The business owns the asset and typically uses it as collateral. Loan payments include principal and interest. Ownership gives you access to depreciation methods and any applicable tax incentives.
  • Equipment leasing: You pay a lessor for the right to use equipment for a defined period. Lease payments are generally deductible as business expenses. Ownership stays with the lessor unless the lease includes a purchase option.

Tax treatment: key rules to know (current through 2025)

  • Section 179 expensing: Section 179 lets eligible businesses elect to expense qualifying equipment in the year it’s placed in service, up to an annual, inflation-adjusted limit. Limits and phase-out thresholds are adjusted annually—check the IRS Section 179 page and Publication 946 for current figures (IRS, Publication 946; IRS Section 179). (https://www.irs.gov/businesses/small-businesses-self-employed/section-179-expense-deduction)

  • Bonus depreciation: The 100% bonus depreciation available under the Tax Cuts and Jobs Act has phased down. For property placed in service in 2025, bonus depreciation is scheduled to be 40% (subject to law changes). This rule affects financed purchases more than most leases because bonus depreciation applies to property you place in service as an owner. (See IRS guidance on additional first-year depreciation.)

  • Standard depreciation: If you do not expense under Section 179 or take bonus depreciation (or are ineligible), equipment is depreciated over its assigned MACRS recovery period.

  • Lease deductibility: Operating lease payments are ordinarily deductible as ordinary business expenses. For tax leases treated as capital leases (or finance leases under accounting standards), the tax treatment can mirror ownership (you may claim depreciation and interest deductions). Always confirm lease classification with your tax advisor and the lessor’s tax counsel.

Cash-flow comparison

  • Upfront cost: Leasing almost always requires a lower initial cash outlay—often only a small down payment or the first month’s payment—while financing typically involves a down payment and closing costs.
  • Monthly cost: Lease payments can be lower than loan payments when structured to preserve cash, but total lease costs over a long term can exceed the financed purchase price plus interest.
  • Flexibility: Leasing provides flexibility to upgrade equipment at lease-end or avoid ownership risk for rapidly depreciating tech. Financing is better when you plan to use equipment beyond the loan term or want to build equity in the asset.

Balance-sheet and financial-statement effects

  • Ownership (financing): The asset and related loan appear on the balance sheet. Depreciation reduces taxable income, and interest on the loan is generally deductible. Financing increases liabilities and impacts leverage ratios (debt-to-equity), which can affect covenants and borrowing capacity.

  • Leasing: Under current U.S. GAAP (ASC 842) and similar frameworks, most leases appear on the balance sheet as a right-of-use asset and lease liability. For tax reporting, however, deductible lease payments continue to be treated as operating expenses for true operating leases. Distinguish financial accounting presentation from tax deductibility.

Real-world examples (numbers simplified)

Example A — Finance a $150,000 machine

  • Purchase price: $150,000
  • Loan: 5-year term at 6% (principal + interest)
  • Tax effects: Eligible for Section 179 or bonus depreciation (if you qualify and elect), reducing taxable income in year 1.
  • Cash-flow profile: Higher initial cash required for down payment; after the loan is paid, you still own the machine.

Example B — Lease similar equipment for 5 years

  • Lease payments: Lower monthly payments with little/no down payment.
  • Tax effects: Lease payments are deductible as an operating expense; you do not claim depreciation.
  • End of term: Options commonly include returning the equipment, renewing, or buying at fair market or pre-agreed price.

Which costs less over time? Do the math

  • Total cost depends on interest/lease rates, useful life, residual value, maintenance costs, and tax elections. In many cases where equipment is used beyond the finance term, financing becomes cheaper over a long run because you own the asset after the loan ends. Leasing may be more expensive in aggregate but can be preferable when rapid obsolescence, maintenance support, or cash preservation matters.

Accounting and covenant impacts I see in practice

In my work advising mid-sized businesses, financing is often preferred when companies need to build asset bases and can manage higher balance-sheet leverage without breaching debt covenants. Leasing is frequently chosen by startups and businesses with fast-changing tech requirements, because operating leases free up capital and usually include maintenance options. Always review credit covenants—some lenders limit lease-based liabilities when calculating allowable additional debt.

Choosing based on usage and risk

  • High utilization for many years: Favor purchase/financing so depreciation and eventual ownership offset cash outlay.
  • Short-term need or technology risk: Favor leasing to avoid obsolescence and preserve capital.
  • Maintenance & uptime needed: Many leases include service; owning means you bear maintenance costs unless you buy a service contract.

State and sales-tax considerations

Sales tax rules vary by state. Some states tax the full purchase price up front; others tax only lease payments. Certain states allow businesses to pay sales tax on lease payments rather than the purchase price, which can improve cash flow. Confirm state rules with your CPA or state department of revenue before structuring a deal.

Modeling tips for your CFO or advisor

  • Build a three-way cash-flow model (payments, tax shield from depreciation/interest or lease deduction, and after-tax cost).
  • Test multiple scenarios: different useful lives, residual values, and tax elections (Section 179 vs. bonus depreciation vs. straight-line).
  • Include off-balance-sheet impacts such as working capital and covenant headroom.

Documentation and recordkeeping

Maintain the purchase agreement or lease contract, proof of placement in service, depreciation schedules, and any Section 179 election documentation. These records are essential for audits or when applying for future financing.

Common mistakes to avoid

  • Ignoring total cost: Comparing only monthly payments is misleading. Calculate net present value or total after-tax cost over the expected holding period.
  • Overlooking tax phase-downs: Assume bonus depreciation will always be 100%—it has stepped down and is 40% for 2025 placements.
  • Forgetting residual value: If you finance and sell later, residual value affects after-tax proceeds; if you lease, purchase options and lease-end conditions matter.

Practical checklist before you sign

  1. Estimate expected useful life and planned hold period. 2. Compare total after-tax cost (NPV) of financing vs leasing for the hold period. 3. Confirm eligibility for Section 179 and check bonus depreciation percentages for the year of placement (IRS guidance). 4. Review lease classification and tax deductibility language in the contract. 5. Check impact on financial covenants and lender approval. 6. Confirm state sales-tax treatment and registration/insurance responsibilities.

Suggested next reading (FinHelp internal resources)

Authoritative references

Professional disclaimer

This article is educational and does not constitute tax, legal, or accounting advice. Tax rules (Section 179, bonus depreciation, and state sales tax) change and are fact-specific. Consult a CPA or tax attorney familiar with your business before making decisions.

Final takeaway

If you want low upfront cost and flexibility, leasing is attractive. If you want long-term ownership, potential tax shields (Section 179 and any available bonus depreciation), and to build balance-sheet equity, financing usually wins. Run scenario models, review tax rules for the placement year, and involve your accountant to pick the option that fits cash flow, taxes, and strategic goals.