Leasing vs. Buying Equipment: Tax Comparison for Small Business
The decision to lease or buy business equipment involves both tax and cash flow considerations. Buying equipment allows the business to claim Section 179 deduction (up to $2,500,000 for 2025, $2,560,000 for 2026) and 100% bonus depreciation in Year 1, creating an immediate, large tax deduction. Leasing (operating lease) allows the business to deduct lease payments as a business expense over the lease term, spreading the deduction evenly. For tax purposes, the IRS distinguishes between a true lease (operating lease, where payments are rent) and a conditional sale (finance lease or capital lease, treated as a purchase with the lessee as owner for depreciation purposes). The classification depends on whether the lease transfers ownership, contains a bargain purchase option, covers 75% or more of the asset’s useful life, or has present-value payments equal to 90% or more of fair market value.
Leasing vs. buying tax comparison:
| Factor | Buy (Section 179 / Bonus) | Operating Lease | Finance Lease (Capital Lease) |
|---|---|---|---|
| Year 1 deduction | Full cost (Section 179 + bonus) | Monthly payments only | Depreciation + interest portion of payment |
| Ongoing deductions | $0 (fully depreciated) | Monthly payments | Depreciation + interest |
| Total deduction over asset life | Cost of asset | Total lease payments (may exceed purchase price) | Cost of asset + interest |
| Asset ownership | Business owns it | Lessor owns it | Business treated as owner for tax purposes |
| Balance sheet impact | Asset + liability (if financed) | Operating expense only | Asset + liability |
| Cash required upfront | Full price (or down payment + financing) | First month + security deposit | Similar to purchase financing |
When buying wins (tax perspective):
| Scenario | Why Buying Is Better |
|---|---|
| High income year, need large deduction | Section 179 creates immediate $50K+ deduction |
| Equipment has long useful life | Depreciation captures full value, no ongoing payments |
| Interest rates are low | Financing is cheap, plus depreciation benefit |
| Equipment retains value | Residual value benefits the owner |
When leasing wins:
| Scenario | Why Leasing Is Better |
|---|---|
| Equipment becomes obsolete quickly | Lease it, return it, get new technology |
| Cash flow is tight | Lower monthly payments, preserve capital |
| Already maximized Section 179 and elected out of bonus | Additional purchases in that class don’t get accelerated depreciation |
| Need to upgrade frequently | Lease terms match upgrade cycles |
| Off-balance-sheet treatment desired | Operating lease doesn’t add debt (for loan covenants) |
How do the numbers compare?
Should an S corp contractor use 179 or bonus on equipment?
For a profitable S corp contractor, either one can write off a $100,000 machine in year one if it was acquired after January 19, 2025. Bonus is often simpler, because it applies automatically and isn’t capped by income. Section 179 has to clear its limits twice, once at the S corp and again on your own return.
On your return, the 179 deduction can’t exceed your taxable income from active trades or businesses, and W-2 wages such as your S corp salary count toward that; anything disallowed carries forward. Section 179 does let you expense part of a machine’s cost, while bonus can only be turned off for a whole class of property for the year. Used equipment works for both if you buy it from an unrelated seller and haven’t used it before.
Once a contractor hits the 179 limit, is MACRS next?
Usually not. Equipment over the Section 179 limit ($2,500,000 for 2025, $2,560,000 for 2026) still gets bonus depreciation by default, and bonus is 100% for property acquired after January 19, 2025. You only land on regular MACRS if you elect out of bonus for that whole class of property, so a buyer at the 179 cap can often still deduct the full cost in year one.
Regular MACRS makes sense mainly when you want the deduction spread out, which is a planning call about later years’ income. If you elect out, 5-year property starts at 20% in year one under the half-year convention, and the election can be revoked only with IRS consent. For vehicles, see Business Vehicle: Buy vs. Lease Tax Comparison and Buying vs Leasing Equipment.
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Yarik Yarosh, CPA. "Leasing vs. Buying Equipment: Tax Comparison for Small Business." Blue Cloud CPA, September 5, 2026, updated September 23, 2026. https://bluecloudcpa.com/guides/small-business-leasing-vs-buying-equipment-tax-comparison
This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.