Quick overview

Deciding between equipment financing and leasing is often about trade‑offs: short‑term cash flow versus long‑term ownership value, tax timing, and accounting impacts. In my practice working with over 500 small and mid‑market businesses, I see two common patterns: start‑ups and fast‑moving tech firms prefer leasing for flexibility, while established operators who plan to use equipment for many years frequently save more by financing and claiming depreciation.

How the two options compare in plain terms

  • Equipment financing: you borrow to buy. The equipment is collateral for the loan; you own the asset once you finish payments. Ownership means you can claim depreciation and, where eligible, immediate expensing under Section 179 or bonus depreciation for the tax year you place the asset in service (subject to IRS limits and phase‑downs). See IRS guidance on depreciation and Section 179 for details (IRS Publication 946 and the Section 179 page).

  • Leasing: you pay to use the asset for a set term. Traditional operating leases treat payments as operating expenses for tax purposes and (under current accounting standards) create a right‑of‑use asset and lease liability on the balance sheet for most lessees (ASC 842). Many leases include maintenance, upgrades, or fleet management.

Authoritative sources: IRS (depreciation and Section 179), FASB (ASC 842 lease accounting), and the U.S. Small Business Administration (financing options).

The real cost: total cost of ownership (TCO) vs. total lease cost

To decide which “saves more,” calculate the TCO for financing and compare it to the total lease cost for the same period. TCO should include:

  • Purchase price or capital cost
  • Interest or lease financing cost (APR or implicit rate)
  • Maintenance, repairs, and downtime
  • Insurance, taxes, and registration fees
  • Residual value (if owned) or end‑of‑term purchase option
  • Tax impact (depreciation, expensing, or lease deductibility)

Example (simplified):

  • Equipment purchase: $100,000. Five‑year loan at 6% APR gives monthly payments ~ $1,933 (principal + interest). Total interest over 5 years ~ $15,000. Residual book value declines via depreciation; you own the machine at the end and can sell it.

  • Lease: Three‑year operating lease with monthly payment $2,900 (includes maintenance). Total lease payments = $104,400. At end, you return the equipment or exercise a purchase option at fair value.

Which saved money? Over three years the lease cost was higher, but the lessee avoided the $20,000 down payment and had predictable maintenance included. Over five years, the financed machine’s effective cost can be lower after accounting for salvage value and tax depreciation.

I recommend running both 3‑ and 5‑year scenarios and comparing net cash outflows after tax benefits.

Tax treatment — timing matters more than the label

  • Financing (ownership): You can recover cost through depreciation. You may also qualify for immediate expensing under Section 179 or bonus depreciation for qualifying property placed in service in the tax year. Section 179 and bonus depreciation rules change annually; check the latest IRS guidance before assuming a deduction level (see IRS: Section 179 and Publication 946).

  • Leasing: Lease payments are generally deductible as business expenses by the lessee. For many businesses this provides immediate tax relief because the entire lease payment reduces taxable income in the period paid. However, you forgo depreciation deductions and any gain from selling the asset later.

IMPORTANT: Bonus depreciation ended its 100% level after 2022 and has been phasing down; consult your tax advisor regarding the percentage available in the tax year you place equipment in service. For current rules, see the IRS bonus depreciation guidance and Publication 946.

Accounting and balance sheet impact

A major non‑tax consideration is accounting rules: under ASC 842 (effective for public companies and adopted by many private companies), most leases create a right‑of‑use (ROU) asset and lease liability on the balance sheet. That reduces the off‑balance‑sheet appeal of operating leases compared with older rules.

  • Financing: loan shows as debt; equipment appears as an asset and is depreciated.
  • Leasing: lessee records ROU asset and lease liability (unless the lease is short‑term and qualifies for exemption). That affects leverage ratios, debt covenants, and metrics like return on assets.

Discuss with your accountant how either option will affect covenants and financial ratios; sometimes a slightly higher cost lease is chosen to avoid violating covenant thresholds.

When leasing tends to save money

  • You need to preserve cash for working capital or growth.
  • Technology changes quickly (IT equipment, medical devices) and you want refresh flexibility.
  • You value predictable total monthly costs that include maintenance.
  • Your business has limited appetite for resale or residual risk.

Leasing also simplifies budgeting: a single monthly payment can include equipment, service, and insurance.

When financing tends to save money

  • You plan to use equipment substantially longer than the financing term.
  • The asset holds residual value (vehicles, certain industrial equipment) that you can sell later.
  • You can use tax credits, Section 179 expensing, or bonus depreciation to reduce taxable income in the purchase year.
  • Lower effective interest cost is available and you want to build asset equity on the balance sheet.

In my work, manufacturers who keep assets 7–10 years typically come out ahead financing, especially when they factor salvage value and multi‑year depreciation.

Practical checklist to run the numbers

  1. Gather offers: loan APR, lease payment, term, residual value or end‑of‑term purchase price, and any fees.
  2. Estimate maintenance, insurance, and downtime costs for each option.
  3. Model cash flow: monthly outflows for each year and cumulative outflow after tax adjustments.
  4. Estimate tax impact: depreciation schedules, Section 179 potential, and lease deductibility with the help of a tax advisor.
  5. Account for accounting rules (ASC 842) and covenant effects.
  6. Run sensitivity scenarios: faster obsolescence, higher maintenance, different resale values.

Common mistakes I see

  • Forgetting maintenance: Leases often include maintenance; buying and skipping maintenance can increase TCO.
  • Ignoring accounting impacts: off‑balance‑sheet thinking can lead to covenant breaches under ASC 842.
  • Using outdated tax assumptions: bonus depreciation and Section 179 limits change; always verify current IRS guidance.
  • Failing to negotiate residual value: lower buyout prices or guaranteed residuals can materially shift the math.

Helpful resources and related reading

Related FinHelp articles that expand this topic:

Final takeaways

There is no universal winner. Leasing often wins for short‑term flexibility, lower initial cash needs, and predictable costs. Financing typically wins on long‑term total cost and ownership benefits when the business plans to use the asset past the loan term and can take advantage of depreciation and tax incentives.

In my practice I recommend creating a two‑scenario model (typical lease term and useful life‑based purchase term), then reviewing tax implications with a CPA and balance‑sheet effects with your controller. That process consistently reveals the option that reduces net cash outflow and aligns with strategic goals.

Professional disclaimer: This article is educational and not personalized tax or accounting advice. Consult a tax professional and your accountant before making equipment financing or leasing decisions.

Sources: IRS (Publication 946, Section 179), FASB (ASC 842), U.S. Small Business Administration, and industry practice (FinHelp editorial research).