Three-way: equipment lease, equipment loan, or cash. Loan wins on total cost when you keep the equipment for its useful life and can use Section 179 / bonus depreciation. Lease wins on monthly payment and on equipment that obsoletes fast (tech, certain medical). Cash wins only when the opportunity cost of capital is below the loan rate — rare for an established business with productive uses for working capital. The tax treatment differs across all three; talk to your CPA before signing.
The lease-vs-loan-vs-cash decision is one of the most consequential capital choices a small business makes, and it is decided badly more often than not. Most analyses focus on monthly payment instead of total cost; most ignore tax effects; almost none factor opportunity cost of cash. This guide compares all three on the dimensions that actually drive the right answer. For broader context see equipment financing.
Three-Way Comparison
| Dimension | Lease | Loan | Cash |
|---|---|---|---|
| Ownership | No (lessor) | Yes | Yes |
| Monthly cost | Lowest | Mid | Zero |
| Total cost | Highest (if held) | Mid | Lowest (ignoring opp cost) |
| Tax treatment | Payments deductible (true lease) | Section 179 + depreciation | Section 179 + depreciation |
| Down payment | Often $0 | 0-20% | 100% |
| End of term | Return, buy, or extend | You own outright | You own outright |
| Best for | Tech, fast-depreciating | Long-life assets | Surplus cash with no better use |
Real Numbers: $100K Equipment, 5-Year Useful Life
Equipment cost: $100,000. Assume 25% effective tax rate.
Option 1: Lease
- FMV operating lease, 5-year term, $1,950/mo
- Total payments: $117,000
- Tax savings: $117,000 × 25% = $29,250
- End of term: return equipment OR buy at FMV
- After-tax cost (excluding any end-of-term buyout): $87,750
Option 2: Loan
- $100K loan, 12% APR, 5-year, monthly P&I = $2,224
- Total payments: $133,440 (interest portion: $33,440)
- Tax savings: Section 179 deduction of $100K in year 1 = $25,000 immediate refund + interest deduction over 5 years ($33,440 × 25% = $8,360)
- End of term: own outright with $0 buyout
- After-tax cost: $133,440 - $25,000 - $8,360 = $100,080
Option 3: Cash
- $100,000 cash out today
- Tax savings: Section 179 deduction $100K = $25,000 immediate refund
- Opportunity cost: if that cash earned 8% in working capital deployment, that is $40K of forgone returns over 5 years
- After-tax cost (excluding opp cost): $75,000
- After-tax cost (including 8% opp cost): $75,000 + $40,000 = $115,000
The headline: lease and cash without opportunity cost look cheap; cash with realistic opportunity cost is actually the most expensive of the three; loan is mid-range and gives you ownership. The right answer depends almost entirely on what else you would do with the cash.
When Each Option Fits
Lease wins when
- Equipment obsoletes fast (technology, certain medical, copiers)
- You want to upgrade every 3-4 years rather than hold for the asset's full life
- You cannot use Section 179 (low taxable income, AMT issues)
- Operating-lease accounting (off-balance-sheet) matters for your reporting
Loan wins when
- You will keep the equipment for its full useful life
- Section 179 / bonus depreciation creates immediate tax savings
- The interest rate is below your blended cost of capital
- You want ownership at the end
Cash wins when
- The cash has no productive deployment elsewhere
- The asset is small relative to total operations
- The available equipment loan rates are unusually high
- Avoiding any debt is a structural priority for the business
Tax Considerations: Section 179 and Bonus Depreciation
Section 179 lets a business expense the full cost of qualifying equipment in the year of purchase, up to a $1.16M limit (2026). Bonus depreciation (currently 60% in 2026, phasing down) lets you deduct a percentage of remaining cost in year 1 and depreciate the rest over the asset's useful life. Both apply to financed-with-loan equipment exactly as they apply to cash-purchased equipment — the loan does not change the deductibility.
For true operating leases, the lessor takes the depreciation; you deduct the lease payments as operating expense. For $1 buyout leases (capital leases), the IRS treats them as financed purchases — you take Section 179 like a loan would.
Talk to your CPA. Tax law changes frequently and the optimal structure depends on your specific tax situation.
Next Step
Have a piece of equipment in mind and want to compare structures? Compare equipment financing offers — lease and loan offers from multiple lenders in one application.
Frequently Asked Questions
Should I lease, finance, or pay cash for equipment?
Pay cash only if the equipment is cheap relative to your reserves; finance to keep cash working while building ownership; lease for the lowest payment and easy upgrades. The right answer depends on cash flow, how long you will keep the equipment, and tax goals.
Is it better to lease or buy equipment for tax purposes?
Buying or financing lets you claim Section 179 and depreciation on the asset; a true operating lease lets you deduct the full payment instead. Which saves more depends on your tax situation, so confirm with your accountant.
Why not just pay cash for equipment?
Cash avoids interest but ties up working capital you may need for payroll, inventory, or opportunities. Financing spreads the cost and preserves liquidity, which is often worth the interest for a growing business.
Frequently Asked Questions
Is leasing or buying equipment cheaper?
Buying with a loan is usually cheaper if you keep the equipment for its useful life. Leasing wins on monthly payment but typically costs more in total. Cash beats both on total cost only when the opportunity cost of capital is below the loan rate.
What is the tax difference?
Lease payments are typically fully deductible as an operating expense. Loan-purchased equipment is depreciated over the asset's useful life (or accelerated under Section 179 / bonus depreciation up to limits). Section 179 can let you deduct $1.16M+ of equipment in year one as of 2026; this often makes a loan more tax-favorable than a lease.
When does paying cash make sense?
When you have surplus cash that does not have a higher-return use, the equipment is small relative to working-capital needs, and the equipment loan rate is high. For most established businesses, financing equipment and keeping cash for working capital is the better move.
What is a $1 buyout lease?
An equipment lease that ends with a $1 purchase option to take ownership. Functionally a loan with a different tax treatment — it captures Section 179 like a loan would. Compare carefully to a true lease to see which structure is cheaper after tax.
Is a TRAC lease the same as a regular lease?
No. A TRAC lease is a vehicle lease with a Terminal Rental Adjustment Clause — the lessee guarantees a residual value at end of lease. Common on Class-8 trucks. Compare to standard FMV (fair market value) leases and to loans.