Equipment Lease vs. Buy: Monthly Payments, Section 179 Tax Breaks, Obsolescence Risk, and End-of-Term Options

A $60,000 machine can cost your business roughly $48,000 or more than $75,000 over five years, and the difference has almost nothing to do with the sticker price. It comes from how you acquire it: whether you buy outright, finance it, sign a fair-market-value lease, or sign a $1 buyout lease that the IRS treats as a purchase wearing a lease costume. Pick the wrong structure and you either tie up cash you needed for payroll or pay thousands extra for flexibility you never use.

This guide walks through the four comparisons that actually decide the question: monthly payments, tax deductions, obsolescence risk, and what happens when the term ends.

The Three Ways Equipment Gets in the Door​

Every equipment deal is one of three structures, and the paperwork name matters less than the economics.

An outright purchase is the simplest: you pay cash (or put it on a card you pay off) and own the asset from day one. Your cash drops immediately, you book depreciation over the asset's life, and there is no lender or lessor in the picture.

A financed purchase covers equipment loans and Equipment Finance Agreements (EFAs). You own the equipment from day one, but a lender holds a lien on it until you pay it off. For tax purposes this is a purchase: you claim depreciation or a first-year write-off on the full price, and the interest portion of each payment is separately deductible.

A lease comes in two flavors that behave nothing alike:

• A fair market value (FMV) lease, sometimes called a true lease or operating lease, is closer to a long-term rental. Payments are lower because you are paying for the equipment's use during the term, not its full value. At the end you can return it, renew, or buy it at its then-current fair market value. You do not own it, so you do not depreciate it; instead, each lease payment is generally deductible as a business expense.
• A $1 buyout lease (also called a capital lease or finance lease in older terminology) is a purchase financed through lease paperwork. Payments are higher because they amortize the full equipment value, and at the end you buy it for $1. The IRS treats this as a conditional sale, which means it qualifies for the same first-year write-offs as a loan-financed purchase.

The practical trap: two proposals can both say "lease" on the cover page while landing on opposite sides of every tax and accounting rule. Always find the end-of-term purchase price before comparing anything else. A nominal buyout means you are buying; a fair-value buyout means you are renting.

Monthly Payments: What Each Structure Really Costs​

Lessors love to lead with the monthly payment, because the FMV lease payment almost always looks cheapest. On a $60,000 machine over 60 months, you might see something like:

• FMV lease: roughly $1,050 to $1,150 per month, with a residual value of 10 to 20 percent built in
• $1 buyout lease or equipment loan: roughly $1,150 to $1,300 per month at typical small-business rates
• Cash purchase: $60,000 out the door, $0 per month after

But the monthly payment answers the wrong question. The right question is total cost of use over the period you will actually keep the equipment, after tax. To compare honestly:

1. Add up every dollar you will pay, including down payments, security deposits, origination or documentation fees, interim rent (charges between delivery and the first full payment, a classic surprise), and any required insurance or maintenance bundles.
2. Subtract what you get back. A buyer keeps an asset with resale value; an FMV lessee who returns the equipment keeps nothing but may have paid far less than the purchase price for five years of use.
3. Subtract the tax benefit of each path (see the next section), discounted to today if you want to be precise. A $60,000 first-year deduction at a 25 percent combined marginal rate is worth about $15,000 in real money.
4. Price your cash. A cash purchase that empties your operating reserve can force you into expensive short-term borrowing later. If buying outright would leave you with less than two to three months of operating expenses in the bank, the "cheapest" option may be the riskiest.

A useful rule of thumb: if you will keep the equipment well past the financing term and it holds value, owning usually wins on lifetime cost. If you will replace it at term end anyway, compare the FMV lease's total payments against purchase price minus realistic resale value — the lease often wins once you account for selling costs and downtime.

Tax Deductions: Section 179, Bonus Depreciation, and Lease Payments​

Tax treatment is where the lease-vs.-buy decision most often flips, so get the 2026 rules straight before you sign.

Buying: Section 179 and bonus depreciation​

Section 179 lets you deduct the full purchase price of qualifying equipment in the year you place it in service, instead of depreciating it over several years. For 2026, businesses can expense up to roughly $2.56 million of equipment, with the benefit phasing out dollar for dollar once total equipment placed in service exceeds about $4.09 million. Key conditions:

• The equipment must be new to you (used equipment from another seller qualifies; inherited equipment does not).
• It must be placed in service — delivered and working — by December 31. A machine still in crates on New Year's Eve buys you nothing this year.
• The deduction cannot exceed your taxable business income. A startup running at a loss cannot use Section 179 to create or deepen a loss, though unused amounts generally carry forward.

Bonus depreciation is the backup: qualifying property acquired after January 19, 2025 is once again eligible for 100 percent first-year bonus depreciation under current federal law. Unlike Section 179, bonus depreciation has no taxable-income cap and no dollar limit, which makes it the tool of choice for large purchases and loss years. Eligibility depends on the property type and acquisition date, so confirm your specific asset qualifies.

Both apply to cash purchases, equipment loans, EFAs, and $1 buyout leases — every structure where you are the tax owner. Neither applies to an FMV lease, because there you are not the owner.

Leasing: deducting payments as you go​

With an FMV lease, you generally deduct each payment in full as an ordinary business expense in the year you pay it. There is no depreciation schedule to maintain and no placed-in-service deadline to hit. Over a five-year lease the total deductions roughly equal the total payments, which is less than the purchase price — but the deductions arrive steadily, matching the cash outflow, with no income limitation to trip over.

The comparison that matters​

• Profitable year, cash to spare: buying with Section 179 usually produces the biggest immediate tax benefit, since you deduct the whole price now.
• Loss year or thin margins: the FMV lease's steady payment deductions may beat a Section 179 deduction you cannot fully use this year.
• High-income business buying big: bonus depreciation's lack of caps can make a large purchase deductible even when Section 179 phases out.

Run both scenarios with your actual marginal rate before deciding. A $60,000 deduction saves $9,000 at a 15 percent rate and $19,200 at a 32 percent rate — the same equipment, wildly different tax value depending on who buys it.

Obsolescence Risk: Who Owns the Downside​

Tax math assumes the equipment is still worth using in five years. Often it is not, and this is the dimension buyers systematically underestimate.

Ask how fast the asset class moves. IT hardware, point-of-sale systems, medical imaging devices, and vehicles with fast-changing emissions or safety tech can lose half their productive value in three years — not just resale value, but usefulness, as software support ends and parts dry up. Machine tools, commercial kitchen equipment, and standard trailers change slowly; a well-maintained unit is genuinely productive at year ten.

With an FMV lease, obsolescence risk sits mostly with the lessor: if the equipment is outdated at term end, you hand back the keys and lease the current generation. You paid a premium for that exit — the lessor priced expected depreciation into your payments — but the premium is capped and known in advance. With a purchase or $1 buyout, the risk is entirely yours: you own a machine nobody wants and still owe the loan balance if you financed it.

Three questions settle it:

1. Will a meaningfully better version exist before the term ends? If yes, lease the use, not the asset.
2. Does the equipment earn more the longer you keep it? Long-lived, slow-changing assets reward ownership; the years after payoff are nearly free capacity.
3. Can you even sell it? Specialized equipment with a thin resale market (custom fabrication tools, niche medical devices) often fetches pennies on the dollar used. If there is no liquid secondhand market, the "resale value" in your buy-vs.-lease spreadsheet is fiction, and the FMV return option is worth more than it looks.

One middle path: negotiate a technology-refresh clause into an FMV lease, letting you swap to newer equipment mid-term. It costs extra, but for fast-moving categories it converts an obsolescence gamble into a budgeted upgrade cycle.

End-of-Term Options: Read This Page Before You Sign Anything​

The end-of-term clause decides what your "cheap monthly payment" actually bought. Typical options:

• Return the equipment. Standard for FMV leases. Watch for return-condition fees, de-installation and freight charges, and automatic renewal clauses that extend the lease at full payment if you miss a written notice window — sometimes 90 to 180 days before term end. Calendar that notice date the day you sign.
• Buy at fair market value. The lessor names a price at term end, and "fair" is negotiable more often than lessees realize. Get competing used-equipment quotes before accepting the number, and check whether the contract defines how FMV is determined.
• Buy for $1 (or another nominal amount). Automatic ownership under a $1 buyout lease. Confirm there are no trailing "closing fees" that quietly turn $1 into several hundred.
• Renew or extend. Often month-to-month at the same payment, which is a terrible deal once the equipment is mostly amortized. Never drift into an auto-renewed extension; renegotiate or exercise a purchase option deliberately.
• Upgrade into a new lease. Common for copiers, IT, and vehicles. The remaining obligation on the old lease is typically rolled into the new one — convenient, but make sure you see the old balance itemized rather than buried in a higher new payment.

Also confirm who pays for maintenance, insurance, and property tax during the term. Many equipment leases are triple-net in practice: you insure it, maintain it, and pay any personal-property tax, exactly as if you owned it. That is fine as long as you budgeted for it; it is a nasty surprise if you assumed the lessor handled everything.

How to Book Each Path in Your Ledger​

Whichever structure you choose, record it so that next year's tax return and this year's cash forecast both read cleanly. The two patterns cover nearly every small-business equipment deal.

An FMV lease payment is a straight expense — no asset, no liability, no depreciation schedule:

2026-11-01 * "Monthly lease payment - CNC mill, FMV lease"
  Expenses:Equipment-Lease            1,095.00 USD
  Assets:Checking                    -1,095.00 USD

A financed purchase splits into the asset and loan at signing, then principal and interest at each payment:

2026-11-01 * "Buy drill press with equipment loan"
  Assets:Equipment:Drill-Press       24,000.00 USD
  Liabilities:Equipment-Loan        -24,000.00 USD
 
2026-12-01 * "Loan payment - drill press"
  Liabilities:Equipment-Loan            358.22 USD
  Expenses:Interest:Equipment-Loan      141.78 USD
  Assets:Checking                      -500.00 USD

If you claim Section 179 or bonus depreciation, keep a separate tax-workpaper note of the first-year write-off; your books still show the asset and its book depreciation, and the difference between book and tax treatment is exactly what your preparer needs at year end. Tracking each financed asset under its own subaccount also makes the end-of-term decision easy: when the payoff quote arrives, the remaining liability balance is already sitting in your ledger. For more on structuring asset and depreciation accounts, see the Beancount documentation on booking methods, and if you want to visualize how equipment debt moves your net worth over time, the Fava balance-sheet reports render it automatically from the same file.

A Decision Checklist Before You Sign​

Work through these in order, and the right structure usually becomes obvious:

1. How long will you actually use it? Under three years or across a technology generation boundary favors an FMV lease; past five years with slow change favors buying.
2. What is your cash position? If buying outright drops reserves below two months of operating expenses, finance or lease regardless of what the lifetime-cost math says.
3. What is your taxable income this year? High income makes Section 179 valuable; a loss year dulls it and favors steady lease deductions or bonus depreciation planning.
4. What is the realistic resale value? Check actual sold listings for your asset class and age, then haircut by 20 percent for selling costs. No liquid market means no resale credit in your model.
5. What does the end-of-term page say? Find the purchase option price, the return-notice window, renewal terms, and who pays maintenance, insurance, and property tax. If any of these are missing, ask before signing, not at term end.
6. What is the all-in total? Compare total cash out minus tax benefit minus residual kept, not monthly payment to monthly payment.

Get competing quotes in both structures — a purchase price from the dealer and an FMV lease from at least one independent lessor — and run the six questions above on real numbers. The best equipment decision is rarely about the machine; it is about matching the financing to how long you will keep it, what you earn this year, and how much risk you want to own when it is obsolete.