Tax Benefits of Leasing vs. Owning Equipment
Deciding whether to lease or buy business equipment is a key choice for any company. In simple terms, leasing means renting equipment for a set period (making regular lease payments) without taking title, whereas owning (buying) means acquiring the equipment outright or via a loan so that the business owns and controls the asset.
For U.S. businesses, this choice has different tax implications. According to the IRS, the first question is whether the agreement is a true lease or a purchase (even if financed). If it’s a lease, payments are deductible as rent; if it’s effectively a purchase, the cost must be recovered through depreciation.
Both options can reduce taxable income, but in different ways. Leasing equipment generally allows businesses to deduct all lease payments as ordinary business expenses, lowering taxable income in the year paid.
In contrast, owning equipment lets businesses take advantage of depreciation: IRS rules let you deduct the equipment’s cost over its useful life (often via accelerated methods). The Tax Cuts and Jobs Act (TCJA) has expanded these incentives, making buying equipment more attractive for tax purposes than it used to be.
However, leasing can still offer important benefits like conserving cash and simpler write-offs. This article explores the U.S. tax rules behind both options so business owners can make an informed decision.
Tax Deductions When Owning Equipment
When a business buys equipment, it records the asset on its books and recovers the cost mainly through depreciation deductions over time. Under the IRS’s Modified Accelerated Cost Recovery System (MACRS), many types of equipment have 5- or 7-year depreciation schedules.
Each year a portion of the asset’s cost can be deducted, reducing taxable income. For example, if you buy a $50,000 machine, you might deduct a fraction of that cost each year for tax purposes.
The biggest tax benefit of owning comes from accelerated write-offs. Two key provisions let businesses deduct most or all of the equipment’s cost immediately: Section 179 and Bonus Depreciation.
Section 179 is an IRS rule that lets eligible businesses expense (write off) the full cost of qualifying equipment in the year it is placed in service, up to set limits. For 2024, the maximum Section 179 deduction is $1,220,000, phased out dollar-for-dollar for equipment costs over $3,050,000. In 2025, the limit rises to $1,250,000 (phased out past $3,130,000).
These limits are generous enough that many small and medium businesses can deduct the entire price of most equipment with Section 179.
(Note: SUVs and some vehicles have a lower limit around $30,000, but other equipment like computers, office machines, and most machinery count fully.) Importantly, the TCJA rules allow used as well as new equipment to qualify for Section 179, further expanding the benefit.
Bonus depreciation is another first-year write-off. For property placed in service through 2022, bonus depreciation was 100%. Starting in 2023, it phases down under current law.
For example, qualified equipment placed in service in 2024 can still use 60% bonus depreciation, and in 2025 this drops to 40% (with 60% available for certain long-production assets).
Bonus depreciation is taken after any Section 179 deduction. In practice, Section 179 plus bonus depreciation means a business often can write off the entire cost of a new or used machine in the first year.
In fact, one tax advisor notes that these incentives are so large that “many businesses will be able to write-off the full cost of most equipment in the year of its purchase”.
When equipment is financed (bought with a loan), the same write-offs apply. Buying with a loan is “normal for successful companies,” and you still get the depreciation benefits.
In addition to depreciation, the interest portion of your loan payments is generally tax deductible as a business interest expense.
(A caveat: very large companies with over $25 million in annual receipts face a 30% cap on deducting interest due to TCJA rules, but most small and mid-sized businesses can deduct equipment loan interest in full.)
Table 1. Tax Deductions When Buying Equipment
| Write-off Type | Description & Benefit |
|---|---|
| Section 179 | Immediate expensing of equipment cost (up to $1,220,000 in 2024). Allows full first-year deduction of qualified purchases. |
| Bonus Depreciation | Additional first-year depreciation (60% for 2024, 40% for 2025) on qualified new/used equipment. Accelerates tax savings. |
| MACRS Depreciation | Standard multi-year depreciation under IRS schedules. Deductions spread over useful life of asset. |
| Interest Expense | If financed, interest on the loan is deductible (subject to limits for large firms). |
Tax Deductions When Leasing Equipment
When a business leases equipment, the tax treatment is simpler in one sense: you do not get depreciation or Section 179 on the asset, because you never own it. Instead, lease payments act like rent and are fully deductible as business expenses. In the IRS’s words, “if the agreement is a lease, you may deduct the payments as rent”.
Practically, this means that 100% of each lease payment reduces your taxable income in the year you pay it (again, as long as it’s a true operating lease and the equipment is used for business). For example, if you lease a piece of equipment for $1,000/month, you can deduct $12,000 of lease expense that year.
This tax feature is confirmed by multiple sources. A financial services firm explains that with a true operating lease, “the lessee does not own anything at the end of the lease term. However, because an operating lease counts as a rental expense, it still qualifies for tax incentives! Business owners may be able to write-off their lease payments.”
Another advisor puts it similarly: “lease payments are generally tax-deductible as ‘ordinary and necessary’ business expenses”. From a cash-flow perspective, leasing is often done with pre-tax dollars, which makes the effective cost lower than buying with post-tax dollars.
In other words, leasing can immediately reduce taxable income dollar-for-dollar by the full amount of the payment. One nuance is that capital leases (also called finance leases) are treated for tax purposes much like a purchase.
If a lease has terms that effectively transfer ownership (such as a bargain purchase option), then the IRS may require treating it as a conditional sales contract, meaning you claim depreciation instead of rent. But most equipment leases are structured as operating leases, letting the lessee simply deduct the payments.
Table 2. Tax Deductions When Leasing Equipment
| Benefit | Description & Notes |
|---|---|
| Lease Payments | 100% of lease payments are deductible as rent/operating expense. Reduces taxable income immediately. |
| No Depreciation Needed | Since the lessee does not own the asset, the business cannot claim depreciation, Section 179, or bonus depreciation on it. (Those go to the lessor.) |
| Cash Conservation | Leasing requires little or no down payment, preserving cash. Lower initial tax outlay since costs are spread as lease payments. |
| Simplicity of Tax Accounting | No need to calculate depreciation schedules or worry about recapture when selling. The tax treatment is straightforward rent expense. |
Comparing the Tax Advantages
- Immediate Write-Off vs. Spread Out Deduction. Buying can allow a huge immediate deduction. With Section 179 and bonus depreciation, many businesses can deduct the entire purchase price in year one.
Leasing, by contrast, gives smaller deductions each year (the lease payments) but spreads them over the lease term. From a tax perspective, owning often offers larger first-year savings.
For example, one consultant notes that if “the largest tax benefit” is desired, financing (buying) often makes the most sense because of Section 179 and bonus depreciation. However, leasing still reduces taxable income by the full amount of payments. - Section 179 and Bonus. Only buyers (or capital lessors) can use Section 179 or bonus depreciation. If you buy equipment, you may expense it all using these provisions (subject to limits). If you lease (as lessee), those tax breaks are not available.
Leased equipment “don’t qualify for 100% first-year bonus depreciation, Sec. 179 or depreciation. These accelerated depreciation methods are only allowed for asset purchases, not leases.”. - Depreciation Recapture. When you own and later sell equipment for more than its depreciated value, the IRS may require you to “recapture” depreciation, meaning some gain may be taxed as ordinary income. Leasing avoids this issue entirely for the lessee, since you never take title and never sell the asset.
- Cash Flow and Timing. Leasing often requires little or no upfront payment, conserving cash. While taxes over time might be similar (for a simple example, writing off $100,000 purchase vs $20,000/year for 5 years of lease can yield the same total deductions), the timing of deductions differs.
Buying front-loads deductions (which can be good if you want to reduce current taxes sharply), whereas leasing spreads them. This flexibility can be important for budgeting: businesses may accept smaller ongoing deductions in return for easier monthly payments. - Ownership and Control. Buying makes the equipment an asset on your balance sheet. You have equity in it and any future sale proceeds benefit you.
Leasing means you must return the asset (unless you have a buyout option) and you don’t build equity. This doesn’t directly affect tax deductions, but it factors into the overall financial decision.
Other Tax Considerations
- Vehicle and Equipment Limits. Certain vehicles have special tax limits. For example, passenger autos have annual depreciation caps, and large SUVs have lower Sec. 179 limits (around $31,000 in 2024).
Also, if you lease a vehicle, IRS rules limit how much of each payment is deductible. These specifics can affect both buying and leasing decisions for cars, trucks, etc. - State Taxes. This article focuses on U.S. federal taxes. Some states have their own rules. For instance, a few states tax lease payments differently, or allow (or don’t allow) accelerated depreciation similar to federal rules. Always check state tax codes as well.
- Tax Credits. In some cases, equipment purchases may qualify for tax credits (e.g. energy-efficient or renewable energy property). Credits are less common for leased equipment (the credit usually goes to whoever placed the property in service, often the owner/lessor).
- Business Use Percentage. Only the portion of equipment used for business is deductible. This applies to both leases and purchases. If you use equipment partly for personal use, you must prorate deductions.
Example Comparison
Imagine a small business needs a new piece of equipment that costs $100,000. Suppose the owner’s tax rate is 21%.
- Buying Scenario: Using Section 179 and bonus depreciation, the business could deduct the entire $100,000 in year 1.
At a 21% tax rate, that could save about $21,000 in taxes (0.21 × $100,000) immediately. (Alternatively, without 100% expensing, the business would depreciate over several years, still gradually reducing taxes each year.) - Leasing Scenario: Instead, suppose the business leases the same equipment for 5 years at $20,000/year ($1,667/month).
Each year it deducts the $20,000 lease expense. At 21%, that saves about $4,200 in taxes annually (0.21 × $20,000). Over 5 years, that totals $21,000 as well, but it is spread over time.
In this simple example, the total tax benefit (about $21,000) ends up the same either way, but the timing differs: buying front-loads all savings into year 1, while leasing spreads them out. If the business has enough profits, it might prefer the big immediate deduction from buying.
But if cash flow is tight, leasing keeps costs smaller each year. Real-world results depend on lease terms, rate of depreciation, tax rates, and whether the business even has enough income to use all the deductions in year 1.
Key Takeaways
- Lease payments are deductible: For a true lease, you can generally deduct 100% of each lease payment as a business expense. This can significantly lower your taxable income each year of the lease.
- Buying unlocks big depreciation write-offs: If you buy (or finance and own) equipment, you can use Section 179 and bonus depreciation to potentially deduct the full purchase price immediately. In effect, you may write off the equipment cost up to the Section 179 limit (around $1.25M in 2025), then depreciate any remaining value over its useful life.
- No “one-size-fits-all” answer: The best choice depends on your business’s needs. For maximum tax savings in one year, buying usually wins. For conserving cash or if you prefer not to own equipment, leasing is attractive and provides its own tax benefit (deductible payments).
- Talk to your tax professional: Tax laws change frequently (e.g., bonus depreciation levels have been declining after 2022), and every situation is unique. Always verify current IRS rules and consider consulting a CPA before deciding.
Frequently Asked Questions
Q.1: Is it better to lease or buy equipment for tax reasons?
Answer: Buying typically offers larger up-front tax deductions through Section 179 and bonus depreciation, which can allow you to expense the full purchase price in year one.
Leasing offers steady deductions over time, since each lease payment is fully deductible. There’s no blanket “right” answer—consider cash flow, how long you need the equipment, and your tax situation.
Q.2: What deductions are available if I buy equipment?
Answer: You can depreciate the asset under IRS rules, including accelerated depreciation. Most importantly, you can use Section 179 and bonus depreciation to deduct much or all of the equipment cost in the year you buy it.
For 2024, Section 179 allows up to a $1,220,000 deduction. Bonus depreciation (60% for 2024) also adds a big first-year write-off. Any remaining value can be depreciated over its useful life.
Q.3: Are lease payments tax deductible?
Answer: Yes. If the lease is a true operating lease, the payments you make are considered ordinary business expenses and are deductible in full.
This applies only to payments themselves; you cannot also claim depreciation on a leased asset (since you don’t own it). (Note: If the lease is actually a finance/capital lease, it may be treated as a purchase for tax purposes.)
Q.4: What is Section 179 and how does it apply?
Answer: Section 179 of the tax code lets businesses immediately deduct the purchase price of qualifying equipment (rather than depreciating it over time). It has annual dollar limits ($1,220,000 in 2024). This is only available if you buy (or finance) the equipment. A leased asset generally does not qualify for Section 179 by the lessee.
Q.5: What is bonus depreciation?
Answer: Bonus depreciation allows businesses to take an extra depreciation deduction in the first year of service. As of recent years, it was 100% for new/used equipment, but now it’s phasing down. For example, it is 60% for property placed in service during 2024, and will drop to 40% for 2025. This applies only when you buy the asset, not when you lease it.
Q.6: Does leasing offer any depreciation benefit?
Answer: Not to the lessee. The lessor (owner) of the equipment claims depreciation. As a lessee, you simply deduct lease payments. In effect, the lease payment already includes the cost of depreciation (built into the rate), so you get the benefit by writing off the payments.
Q.7: Can I claim Section 179 on a leased asset?
Answer: Generally, no. Section 179 applies to assets you have bought and placed in service. If you lease equipment (and you do not take title), you cannot claim Section 179 on it. Only when you purchase equipment (including via a loan or capital lease) can you use Section 179.
Q.8: Do I still get tax deductions if I finance an equipment purchase?
Answer: Yes. Financing (taking a loan to buy equipment) still qualifies you as the owner for tax purposes. You can use depreciation, Section 179, and bonus depreciation on the equipment as if you had paid cash. Plus, you get to deduct the interest portion of the loan payments.
Q.9: Are there limits on these deductions?
Answer: Yes. Section 179 has dollar limits (around $1.2–$1.25 million) and a phase-out threshold (around $3–$3.13 million). Bonus depreciation will phase out by 2027 under current law.
Also, you can only deduct expenses against income: you cannot use Section 179 or bonus depreciation to create a taxable loss (any excess deduction carries forward). And for leased passenger vehicles, IRS special rules may limit the deductible amount each year.
Conclusion
Both leasing and buying equipment have valid tax advantages under U.S. law. Buying (owning) equipment gives you access to powerful depreciation deductions like Section 179 and bonus depreciation, allowing large write-offs upfront.
On the other hand, leasing simplifies your taxes by letting you deduct lease payments as routine business expenses and avoids dealing with depreciation schedules altogether.
The best choice depends on your situation. If maximizing the current-year tax deduction is your priority and you have enough income to use it, purchasing often yields the largest break.
If preserving cash and minimizing hassle is more important, leasing may be preferable—and still gives you the benefit of lowering taxable income by the full lease payments. In either case, these tax rules are constantly updated by law, so it’s wise to consult a tax professional before making a decision.
By understanding how the U.S. tax code treats each option, you can align your equipment strategy with both your financial and operational goals.