Equipment financing
Equipment Loan vs Lease: Which Is Better for Your Business?
Own it or rent it? The answer depends on how long the equipment earns, how fast it goes out of date, and whether you want the Section 179 deduction this year. Here is the side-by-side, with the numbers.
Loan or Lease: The Short Answer
Finance (loan or $1-buyout lease) equipment you will keep for most of its useful life — trucks, machinery, lifts, practice equipment. You own it, you take Section 179 or bonus depreciation on the full price in year one, and the total cost is lowest. Lease (fair-market-value) equipment you will replace in three to five years — computers, phone systems, some fleet vehicles — where a lower payment and easy upgrades matter more than ownership. In 2026, with Section 179 at $2.56 million and 100% bonus depreciation, the tax case for owning is the strongest it has been.
Side by Side
| Equipment loan (EFA) | $1-buyout lease | Fair-market-value lease | |
|---|---|---|---|
| Ownership | You own from day one; lender holds a lien | Lender owns until you pay $1 at the end | Lender owns throughout |
| Monthly payment on $100K, 60 months, ~10% | About $2,125 | About $2,125 | About $1,700–$1,900 (residual 10–20%) |
| End of term | Lien released | Pay $1; equipment is yours | Buy at market value, renew, or return |
| Section 179 / bonus depreciation | Yes, full price in year one | Yes, full price in year one | No; payments are deducted as rent |
| Balance sheet | Asset and liability | Asset and liability | Operating expense (with ASC 842 lease disclosure) |
| Down payment | 0–20% | 0–20%, often first and last payment | First and last payment |
| Upgrade flexibility | Sell or trade when you choose | Same | Built in at term end |
| Total cost over the term | Lowest if you keep the equipment | Lowest if you keep the equipment | Lowest payment, highest cost if you end up buying |
When a Loan or $1-Buyout Lease Wins
- The equipment lasts. Trucks, excavators, CNC machines, dental chairs and auto lifts run 7 to 15 years; paying for 5 and owning for 10 is the cheapest way to have them.
- You want the deduction this year. Section 179 (up to $2,560,000 in 2026) and 100% bonus depreciation apply to purchases, including financed ones, not to FMV leases.
- You plan to build equity you can borrow against later (sale-leaseback) or trade in.
- You run the equipment hard. Leases charge for excess wear and hours at return.
When a Fair-Market-Value Lease Wins
- The equipment goes out of date fast. Computers, servers, phone systems, diagnostic software, some medical technology.
- Cash flow is the constraint. The residual lowers the payment 10–25%.
- You want a built-in upgrade path every three to five years.
- You do not need the depreciation this year — a business with a loss, for example, cannot use the deduction.
The Tax Difference, in Numbers
A $100,000 machine financed with a loan in 2026: deduct $100,000 under Section 179 in year one. At a 30% combined rate that is $30,000 back on next spring’s return, against about $25,500 of payments made in the first year. The same machine on a five-year FMV lease at $1,800 a month: deduct $21,600 of lease payments in year one, worth about $6,500. The loan owner is roughly $23,000 ahead in year one and owns the machine at the end; the lessee has lower payments and an option. Talk to your accountant: the right answer depends on your income this year and next. See Section 179 and equipment financing.
Year-one tax saving, $100,000 machine, 30% combined rate
Illustrative. Deductions are limited to business taxable income; unused Section 179 carries forward.
Other Structures Worth Knowing
| Structure | What it is | When it fits |
|---|---|---|
| TRAC lease | Terminal rental adjustment clause lease for titled vehicles; you set the residual | Trucks and fleet vehicles; combines low payment with a known buyout |
| Sale-leaseback | You sell equipment you own to a lender and lease it back | Unlocking cash from paid-off equipment |
| Seasonal or step payments | Lower payments in slow months | Landscaping, agriculture, seasonal businesses |
| Deferred first payment | 60–90 days before the first payment | Equipment that needs time to start earning |
A Quick Decision Rule
- Will you still be using it in five years? Yes: finance it.
- Does it lose half its value in three years? Yes: lease it.
- Do you have taxable income to absorb a large deduction this year? Yes: finance it.
- Is the monthly payment the binding constraint? Yes: lease, or finance over a longer term.
- Not sure? Ask for both quotes. We place both through the same lenders and show the total cost of each.
Common Questions
Is it better to lease or buy equipment for a small business?
Buy (with a loan or $1-buyout lease) if you will keep the equipment for most of its life and can use the Section 179 deduction. Lease if the equipment goes out of date quickly or the lowest payment matters most.
Can I claim Section 179 on leased equipment?
On a $1-buyout (capital) lease, yes, because it is treated as a purchase. On a fair-market-value (operating) lease, no; you deduct the lease payments instead.
What is a $1 buyout lease?
A lease structured so you buy the equipment for $1 at the end of the term. Economically it is a loan; lenders use it for documentation and state-law reasons. You get the same tax treatment as a purchase.
What is the difference between an equipment finance agreement and a loan?
An EFA is the standard equipment loan document: you own the equipment, the lender takes a security interest, and you repay in fixed installments. The terms are used interchangeably.
Can I get out of an equipment lease early?
Usually by paying the remaining payments, sometimes with a discount, or by buying the equipment at the early-buyout price in the contract. Loans typically allow early payoff with little or no penalty.
Sources
- Section 179 deduction guide 2026 — Block Advisors
- How equipment financing works: 2026 guide — Crestmont Capital
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