Should I finance equipment with a business loan or lease it?

Financing equipment with a loan builds ownership and maximizes IRS Section 179 and bonus depreciation deductions; leasing preserves cash flow and keeps equipment off the balance sheet but typically costs more over the full term — the right choice depends on how long you'll use the equipment and your current tax position.

The ownership argument — IRS Section 179 and bonus depreciation

When you finance equipment with a loan, you own the asset from day one — and ownership triggers two powerful tax deductions. IRS Section 179 allows businesses to deduct the full purchase price of qualifying equipment placed in service during the tax year, up to $1,220,000 for 2024 (adjusted annually). IRS Section 168(k) — the bonus depreciation provision — allows additional first-year deductions on top of Section 179. For a profitable business, these deductions can substantially offset the cost of the loan in year one. Neither deduction is available to an operating lessee.

The leasing argument — cash flow and flexibility

An operating lease keeps the equipment off your balance sheet (it remains an operating expense) and requires no down payment in most structures. For businesses with strong seasonal cash flow cycles or rapidly evolving equipment needs — medical devices, technology hardware, construction equipment with short useful lives — leasing provides the ability to upgrade without facing residual value risk on old equipment. Operating lease payments are fully deductible as business expenses under IRS Publication 535.

Total cost comparison

Illustrative $100,000 Equipment — Loan vs. Lease

Loan: $100,000 at 8% over 5 years = ~$2,028/month, total paid ~$121,700. Section 179 deduction in Year 1 at a 25% effective tax rate = $25,000 tax savings. Net economic cost after tax benefit: ~$96,700. Lease (operating, 60 months): $2,200/month, total paid $132,000 (no residual ownership). Lease payments fully deductible = ~$33,000 tax savings. Net economic cost: ~$99,000. Note: This is illustrative only. Actual rates, residual values, and tax positions vary significantly. Consult a CPA before making a lease-vs-buy decision.

Decision framework

Use equipment for 5+ years and have taxable income → loan likely wins on total cost after Section 179/bonus depreciation.
Need to upgrade every 2-3 years or equipment has high obsolescence risk → lease keeps you flexible.
Cash constrained → lease minimizes upfront; loan may require 10-20% down.
Balance sheet matters for future financing → loan adds both asset and liability; operating lease keeps leverage ratios cleaner.

Equipment Financing Tax Facts

IRS Section 179 allows businesses to deduct the full purchase price of qualifying equipment placed in service during the tax year — the 2024 deduction limit is $1,220,000 with a phase-out beginning at $3,050,000 in total equipment purchases. — IRS — Publication 946, How to Depreciate Property
IRS Section 168(k) — the bonus depreciation provision introduced by the Tax Cuts and Jobs Act — allowed 100% first-year bonus depreciation through 2022; it phases down at 20% per year, reaching 40% for assets placed in service in 2025 and 20% in 2026 before full phase-out. — IRS — Bonus Depreciation (Section 168(k))
Business lease payments — for operating leases — are generally fully deductible as ordinary and necessary business expenses under IRC § 162 and IRS Publication 535. — IRS — Publication 535, Business Expenses

Key takeaways

Financing equipment with a loan enables Section 179 and bonus depreciation deductions that can substantially reduce the net economic cost in Year 1 — leasing forfeits these deductions.
Leasing preserves cash flow, eliminates down payment requirements, and reduces residual value risk on rapidly obsoleting equipment.
The total-cost winner depends on how long you'll use the equipment, your effective tax rate, and whether your balance sheet can support the additional liability.
For most profitable small businesses that plan to use equipment for 5+ years, financing ownership is typically cheaper on a total-cost basis after tax benefits.