Equipment Financing: Buy vs Lease
Compare buying, financing, and leasing equipment after tax — with Section 179 and permanent 100% bonus depreciation factored in, the interaction most comparisons ignore.
Written by Dorothy Ibrahim, 10+ years in banking & finance
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How we calculate this
This calculator compares the after-tax cost of paying cash, financing, or leasing equipment — including the tax interaction most comparisons ignore: an owned asset (or a $1-buyout lease) can be deducted in full in year one through Section 179 and permanent 100% bonus depreciation, while a true/FMV lease trades that big first-year deduction for payments deducted as you go. The winner is whichever option leaves you with the lowest total after-tax cost.
The formulas
- Year-1 deduction (cash / finance / capital lease)
- Section 179 up to the limit ($2,560,000 for 2026, phased out dollar-for-dollar above $4,090,000 of purchases) + 100% bonus depreciation on any remainder — together, the full equipment costSection 179 cannot create a loss; bonus depreciation can.
- Year-1 tax savings
- year-1 deduction × marginal tax rate
- Cash after-tax cost
- equipment cost − year-1 tax savings
- Finance after-tax cost
- down payment + all loan payments − year-1 tax savings − (total interest × marginal tax rate)Interest is deductible too; the treatment is nominal and undiscounted — disclosed below.
- Capital-lease implicit interest
- total lease payments + buyout − equipment costThe finance charge baked into a $1-buyout lease; deductible like loan interest.
- Capital ($1-buyout) lease after-tax cost
- total lease payments + buyout − year-1 tax savings − (implicit interest × marginal tax rate)Treated as a purchase for tax — Section 179 / bonus eligible; the implicit finance charge is deducted like loan interest, symmetric with the finance option so the comparison is apples-to-apples.
- True/FMV lease after-tax cost
- total lease payments × (1 − marginal tax rate) + buyoutPayments are deductible as rent; no Section 179 or bonus depreciation.
Worked example
- Say the equipment costs $150,000, you are in a 30% marginal bracket, and it is placed in service in 2026.
- Owning it (cash, finance, or a $1-buyout lease) deducts the full $150,000 in year one, worth $45,000 in tax savings at 30%.
- Cash: $150,000 − $45,000 = $105,000 after tax.
- Finance: 10% down ($15,000) and $135,000 at 9% over 60 months → payment $2,802.38, total interest $33,142.68. After-tax cost = $183,142.68 paid − $45,000 depreciation savings − $9,942.80 of interest deductions = $128,199.88.
- Capital lease at $2,900/month for 60 months with a $1 buyout: $174,001 paid − $45,000 depreciation − $7,200.30 implicit-interest deduction (30% of the $24,001 by which the payments exceed the $150,000 cost) = $121,800.70 after tax.
- Winner: cash, by $16,800.70 over the capital lease — but financing and the capital lease both get the identical $45,000 year-one deduction (plus a deduction for their interest) while spreading the cash outlay over five years, which is the real decision.
Rates, benchmarks & sources
- Section 179 limits: $2,560,000 deduction limit and $4,090,000 phase-out start for 2026 ($2,500,000 / $4,000,000 for 2025), and the rule that §179 cannot create a loss. — OBBBA §70301; Rev. Proc. 2025-32 §3.02/§4.24
- 100% bonus depreciation, permanent, for qualified property placed in service after Jan 19, 2025 — bonus can create a net operating loss. — OBBBA §70401
Figures current as of 2026-07-02. See our methodology & editorial standards for how constants are versioned and verified.
What this tool doesn’t model
- Tax treatment is simplified and nominal: tax savings are not discounted to present value, all deductions are assumed usable in the year modeled, and state depreciation rules (many states decouple from §179/bonus) are not modeled — federal only.
- Assumes you have enough taxable business income to absorb the deductions; §179 in particular is limited to business income and cannot create a loss.
- Lease classification for tax is a facts-and-circumstances question — this tool applies the common shorthand ($1-buyout ≈ purchase, FMV ≈ true lease), but your lease terms and a tax professional determine the actual treatment.
- Financing terms are estimates, not offers — equipment lenders underwrite the asset and your credit, and lease pricing varies with residual assumptions.
- Resale/residual value of the equipment at the end of the term is not modeled, which favors leases with meaningful buyouts less than reality might.
Frequently asked questions
Why does financing get the same year-one deduction as paying cash?
Because tax depreciation follows ownership, not payment. Once the equipment is placed in service, you own it whether you paid cash or borrowed — so §179 and 100% bonus depreciation deduct the full cost in year one either way. That is the interaction the headline highlights: financing lets you take the entire $45,000 tax benefit now while paying for the machine over 60 months.
What is the difference between a $1-buyout lease and a true/FMV lease?
A $1-buyout (capital) lease transfers ownership for a nominal amount at the end, so tax law treats it as a purchase — you depreciate the equipment (§179/bonus eligible) rather than deducting payments. A true/FMV lease keeps ownership with the lessor; you deduct each payment as rent but get no depreciation. The default example shows the tradeoff: identical payments, different timing and size of deductions.
Is the true lease ever the cheaper option?
It can be, but the gap is usually small. In the default inputs the true lease lands at $121,801 after tax — you deduct the full $174,000 of payments and pay only a $1 (illustrative) buyout, while never buying the asset. Because the capital lease now also deducts its implicit interest, it comes out at essentially the same $121,801, so the deciding factor is what you own at the end and the size of any real buyout — not a tax gap. Whether either beats owning depends on the buyout, your bracket, and how long the equipment stays useful.
What happens if I buy more equipment than the Section 179 limit?
For 2026, the §179 deduction limit is $2,560,000 and it phases out dollar-for-dollar once total qualifying purchases exceed $4,090,000. But with 100% bonus depreciation permanent under OBBBA, any cost §179 cannot absorb is generally deducted through bonus anyway — the tool shows this: a $5,000,000 purchase still produces a $5,000,000 year-one deduction.
Should I trust this as tax advice for my purchase?
No — it is an educational comparison using simplified, federal-only math. Real outcomes depend on your entity type, business-income limits on §179, state conformity, and how your lease is actually classified. The numbers here frame the decision; a CPA or EA should confirm the treatment before you sign, and actual financing offers depend on lender underwriting.
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themoneysheet provides educational estimates, not financial, tax, or legal advice. Figures use published rates and formulas current as of the date shown, but your situation may differ. Consult a qualified professional (CPA, attorney, or licensed advisor) before making financial decisions. Rates shown are estimates; actual offers depend on lender underwriting.