Buying vs. Leasing Equipment: Which Is Right for Your Business?

When your business needs equipment, machinery, office hardware, technology, or other fixed assets, deciding whether to buy or lease is often a critical financial choice. There’s no one-size-fits-all answer. The right decision depends on your cash flow, how long you’ll use the equipment, and how you want to treat it on your balance sheet and tax returns.

Below is a thorough breakdown of the pros and cons of each option, helping you choose what makes the most sense for your business now and in the long run.

Pros of Buying Equipment

When you buy equipment, it becomes a business asset you own, control, and can use for as long as it’s useful. For equipment that will serve you for many years and isn’t likely to become obsolete, ownership often represents the most cost-effective path over time.

Thanks to tax law, many purchases qualify for generous first-year deductions. In particular: the Section 179 deduction, and bonus depreciation can let you write off most or all the cost of qualifying equipment in Year 1. For many types of business assets, from heavy machinery to office furniture and computers, this can make buying significantly more tax-efficient than leasing.

As owner, you can customize, modify, or repurpose the equipment as business needs to change. Once it’s paid off or depreciated, you avoid ongoing rental or lease costs, giving you lower recurring expenses.

Under the TCJA, bonus depreciation has been extended to include used property. For tax years starting in 2023, bonus depreciation deductions will be phased out based on the following schedule:

• 80% for property placed in service in 2023,
• 60% for property placed in service in 2024,
• 40% for property placed in service in 2025, and
• 20% for property placed in service in 2026.

Bonus depreciation is scheduled to expire at the end of 2026, unless Congress decides to extend it.

These two tax breaks can be a powerful combination: Many businesses will be able to write off the full cost of most equipment in the year it's purchased. Any remainder is eligible for regular depreciation deductions over IRS-prescribed schedules.

Important note: Other rules and restrictions may apply, including limits on annual deductions for vehicles and restrictions on "listed property" (such as TVs).

Drawbacks to Buying

High upfront capital requirement paying in full or financing means higher initial cash outlay.  If financing, you may need a down payment, involve interest, and potentially tie up credit lines.  

Risk of Obsolescence: If equipment is high-tech or subject to rapid change (e.g. computers, specialized machinery), it may lose value quickly.

If you finance a purchase through a bank, a down payment of at least 20% of the cost is usually required. This could tie up funds and affect your credit rating.

In addition, when you own an asset, you run the risk that it could quickly become outdated or obsolete. It may be difficult to unload the equipment at a reasonable price, not to mention the headache of trying to sell it. For example, if you buy computers costing $5,000 today, they could be worth only $1,000 or less in just three years.

Why Leasing Equipment Can Be Beneficial

Leasing typically requires little or no down payment, which helps preserve working capital useful for smaller firms, startups, or businesses with tight cash flow. Monthly lease payments are usually lower than financing payments for a purchase because you’re only paying for the use of the asset over the lease term.

Leasing removes the risk of getting stuck with outdated equipment: when technology changes fast or when an asset is only needed temporarily, returning the leased equipment avoids resale hassles and obsolescence problems. For businesses with limited credit or difficulty obtaining loans, leasing may be easier and quicker than financed purchases.

Lease payments are generally deductible as ordinary business expenses simplifying bookkeeping and reducing taxable income without the complications of depreciation or bonus-depreciation limits. Another benefit is it can also can avoid certain tax complications (e.g. depreciation of recapture) that may arise when selling or replacing owned equipment.

The Disadvantage to Leasing

You don’t own the asset; at the end there’s no equity, no resale value, no permanent asset for your balance sheet. Over time, total lease payments may exceed what buying the equipment would have cost making leasing more expensive long-term.

You may be locked into the lease term even if you no longer need the equipment and end up paying for unused assets.

How to Decide: Key Questions to Ask

Your decision should be guided by a mix of financial, operational, and strategic considerations. Here are key questions to evaluate:

• Do you have sufficient cash flow or financing capacity?
  
  • If yes and long-term use is expected, the best option would be to Buy. If cash is tight or uncertain, your best option would be to Lease.
• Is the equipment likely to become obsolete or require frequent upgrades?
  
  • If yes you would want to Lease. If no, then you’d want to Buy.
• Do you want to build long-term equity or own the asset outright?
  
  • Buy, for ownership control.
• Is preserving working capital more important than owning assets?‍
  
  • Lease may better preserve liquidity.
• Are there tax considerations (current-year deductions, depreciation, Section 179, bonus depreciation)?
  
  • Buy, to maximize tax incentives (if qualified).
• Do you prefer to treat costs as regular operating expenses vs. capital assets / depreciation?
  
  • Lease, for easier expense treatment.

When Buying Is Best and When Leasing Wins

Buy When:

• You need equipment long-term and expect consistent use over many years.
• The asset has a long useful life and isn’t likely to become obsolete.
• You have sufficient capital or financing or want the tax advantages of bonus depreciation with Section 179.
• You value ownership, flexibility to modify and resell, and building assets on your balance sheet.

Lease When:

• Cash flow or credit is constrained.
• Equipment is likely to age quickly or become outdated  
• You prefer predictable, lower monthly payments rather than a large upfront outlay.
• You want to treat the cost as an operating expense.
• You plan only short-term or interim use of the equipment or expect it to upgrade soon.

Decision Time

There’s no universal best answer. The right choice depends on your business’s financial health, asset needs, and long-term plans. Many businesses find a hybrid approach that works best owning core, long-term assets; leasing more volatile or short-term-use items; and reviewing lease vs. buy decisions as needed to evolve.

Before deciding, it’s wise to run different scenarios factoring in cash flow, tax impact, resale value, and depreciation. Consulting with a financial advisor or accountant helps ensure the choice aligns with your broader business strategy.

Sources

• Buying vs Leasing Equipment: What Makes Sense for Your Business?
• Buying vs Leasing Equipment: Tax Implications for Business Owners‍

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