When should I buy equipment?

Buy when: (1) You'll use the equipment well beyond typical lease terms (5-7+ years). (2) Equipment retains value reasonably well (durable manufacturing, furniture, basic machinery). (3) Section 179 or bonus depreciation eligible (immediate tax benefit). (4) You want to build business equity. (5) Cash flow allows the upfront cost. (6) Equipment may be modified for specific use. (7) You don't need flexibility to upgrade frequently. Purchase generally favors durable, long-lived equipment.

When should I lease equipment?

Lease when: (1) Technology changes rapidly (computers, certain medical/manufacturing). (2) You need predictable monthly costs without large upfront capital. (3) Equipment will be obsolete before useful life ends. (4) You want maintenance/support included. (5) You may need to upgrade frequently. (6) Cash flow constraints prevent upfront purchase. (7) Tax deduction simplicity matters more than depreciation complexity. (8) Equipment use uncertain — flexibility to return at lease end. Leasing generally favors technology equipment and capital-constrained businesses.

What is the tax impact?

BUY: Depreciation deductions over useful life (5-15 years typical for equipment). MACRS accelerated method for most equipment. Section 179 can allow immediate expensing up to $1,160,000 (2024) of qualifying purchases. Bonus depreciation 60% additional immediate expense (2024). LEASE: Operating lease payments fully deductible as business expense in year paid (simpler tax treatment). Capital leases treated similarly to purchase. Tax benefit depends on marginal rate. For most businesses, purchase with Section 179/bonus depreciation produces larger year-1 tax benefit; lease produces smoother annual deductions.

Is leasing always more expensive than buying?

Generally yes over the full asset life, but not always. Leasing typically costs 15-30% more total when including all factors (financing cost, residual value, tax benefits). However: short usage horizons (under lease term), capital constraints making purchase impossible, included maintenance/support, and technology obsolescence can flip the analysis. Always run specific numbers — qualitative factors often determine right answer even when buy/lease costs are close.

What is Section 179 and how does it affect this decision?

Section 179 allows businesses to immediately expense (vs. depreciate over years) up to $1,160,000 (2024 limit) of qualifying equipment purchased and placed in service. Most equipment, vehicles (with limits), computers, software qualify. Phases out for total purchases over $2.89M. Limited to taxable income. Significantly improves purchase economics by accelerating tax benefit from years to immediate. Combined with bonus depreciation, can fully expense most equipment in year 1. Often tilts the buy vs. lease analysis toward purchase. Annual limits change — verify current year with accountant.

Equipment Buy vs Lease Calculator

Compare the total cost of purchasing equipment outright versus leasing it. Factor in purchase price, loan terms, depreciation, lease payments, and tax benefits to determine which option is more cost-effective for your business.

The equipment buy vs. lease decision is a major capital allocation choice for businesses. Buying builds ownership and equity but requires upfront capital (or financing); leasing preserves capital and provides flexibility but typically costs more total over time and produces no asset at end. The right answer depends on multiple factors: useful life vs. lease term, tax treatment, equipment obsolescence risk, capital availability, financing access, and operational considerations.

The financial framework: compare total after-tax cost of each option over the same time horizon, accounting for depreciation tax benefits of purchase, deductibility of lease payments, residual value of purchased asset, and time value of money. Lease payments are typically fully deductible as business expenses. Purchased equipment depreciates over useful life (with potential Section 179 and bonus depreciation accelerating deductions). At end of analysis period, purchase produces an asset (residual value) while lease ends with no residual. These tradeoffs often produce close decisions where qualitative factors (technology obsolescence, flexibility needs) determine the right choice.

This calculator computes total cost of buying (financing + depreciation tax benefits + residual value) vs. leasing (lease payments + tax deductions) over your analysis period. Use it for: major capital purchase decisions, comparing specific lease offers to purchase financing, evaluating fleet/equipment replacement strategies, or learning the framework for buy vs. lease analysis. Important considerations: technology equipment with rapid obsolescence (computers, certain machinery) often favors leasing; durable equipment with long useful life (furniture, basic machinery) often favors buying. Section 179 and bonus depreciation can dramatically improve purchase economics by allowing immediate expensing of much equipment cost — verify current tax law and limits before deciding.

Inputs

Equipment Cost

Useful Life (Years)

Residual Value

Loan Interest Rate

Monthly Lease Payment

Lease Term (Years)

Tax Rate

Results

Net Buy Cost

$40,803

Net Lease Cost

$45,000

Savings

$4,197

Buy is better

Monthly Loan Payment

$990

Cumulative Cost Comparison

Total Cost Summary (After Tax)

Last updated: May 27, 2026Reviewed by the CalcMountain editorial team

Formula

Buy scenario total cost over analysis period T: If financed: Down payment + (Monthly Loan Payment × Loan Months) − Tax Benefits from Depreciation − Residual Value at T If cash purchase: Equipment Cost − Tax Benefits from Depreciation − Residual Value at T Tax benefit from depreciation = Annual Depreciation × Tax Rate × Years Lease scenario total cost over analysis period T: Total Lease Cost = Monthly Lease × (T × 12) × (1 − Tax Rate) (Lease payments fully deductible as business expense, so after-tax cost is reduced by tax rate) Comparison: Buy Cost (after-tax) = financing + ownership costs − tax benefits − residual value Lease Cost (after-tax) = lease payments × (1 − tax rate) Lower number wins for that scenario. Example: $50,000 equipment, 5-year useful life, $5,000 residual value, 7% loan rate, $1,000/month lease for 5 years, 25% tax rate. Buy scenario (cash purchase, straight-line depreciation): Equipment: $50,000 Annual depreciation: ($50K − $5K) / 5 = $9,000/year Tax benefit per year: $9,000 × 25% = $2,250/year Total tax benefit over 5 years: $11,250 Residual at year 5: $5,000 Net cost: $50K − $11,250 − $5K = $33,750 Buy scenario (financed, 5-year loan at 7%): Monthly payment: $50K at 7% over 60 months = $990/month Total payments: $59,400 Plus interest tax deductibility: ~$9,400 interest × 25% = $2,350 tax saving Less depreciation tax benefit: $11,250 Less residual: $5,000 Net: $59,400 − $2,350 − $11,250 − $5,000 = $40,800 Lease scenario: Annual lease: $1,000 × 12 = $12,000 After-tax annual cost: $12,000 × 75% = $9,000 Total 5-year: $45,000 Comparison: Cash purchase: $33,750 (best) Financed purchase: $40,800 Lease: $45,000 Cash purchase wins on pure financial cost. But cash buyer must have $50K available; lease and financed alternatives preserve capital for other uses. If purchase eligible for Section 179 (full year-1 expense): Year 1 depreciation: $50,000 (vs. $9K spread) Year 1 tax benefit: $12,500 (full deduction × 25%) Net cash purchase cost: $50K − $12,500 (year 1) − $5K residual = $32,500 Even better. Section 179 transforms purchase economics significantly. Key qualitative factors beyond pure cost: Cash flow and capital availability: Tight cash → lease (preserves capital) Strong cash → buy (capture economic benefits) Equipment lifespan vs. lease term: Use equipment well beyond lease term → buy (avoid endless lease cycle) Lease matches useful life → either acceptable Technology obsolescence: Rapid obsolescence (computers, certain medical) → lease (upgrade flexibility) Stable technology (furniture, basic machinery) → buy Maintenance: Maintenance included in lease → reduces total cost Owner responsible for maintenance on purchase → factor into cost Section 179 eligibility: Eligible → dramatically improves purchase economics Not eligible → straight depreciation, slower tax benefits Type of lease: Operating lease (most common): Like extended rental Lease payments fully deductible No ownership transfer Lower monthly payments Equipment returned at lease end (or buyout option at fair market value) Capital lease (less common): Treated similarly to purchase for accounting/tax Equipment on balance sheet Depreciation deductible (not lease payments directly) Typically includes purchase option at end Different lease structures have different tax implications. Verify with accountant before signing.

How to use this calculator

Enter equipment cost (purchase price).
Enter expected useful life (in years).
Enter expected residual/salvage value at end of useful life.
Enter loan interest rate (if financing the purchase).
Enter monthly lease payment (from lease quote).
Enter lease term in years (typically matches or exceeds useful life).
Enter your effective business tax rate.
Review buy total cost vs. lease total cost.
Consider qualitative factors beyond cost: cash flow position, technology obsolescence risk, maintenance preferences, flexibility needs.
For Section 179 eligible equipment: dramatically improves purchase economics. Consult tax accountant about applying.
For technology with rapid obsolescence: lease often makes more sense despite higher base cost (avoids being stuck with outdated equipment).
For durable equipment with long useful life: buy usually wins financially after factoring in residual value and ability to use beyond lease term.
Get multiple lease quotes — leasing companies vary substantially on terms for same equipment.

Worked examples

Office computers — lease favored

40 office computers: $2,500 each = $100,000 total. 3-year useful life (rapid obsolescence). $0 residual value typical for 3-year-old computers. 25% tax rate. Cash purchase: $100K, depreciation $33K/year for 3 years. Tax benefit: $25K total ($8.3K × 3 × 25%). Net cost: $100K − $25K − $0 residual = $75K Lease at $30/month per computer × 40 × 36 months = $43,200 over 3 years. After-tax: $43,200 × 75% = $32,400 Lease wins by $42K. Plus benefits: includes warranty/maintenance, upgrades to new computers every 3 years, no disposal hassle. Technology equipment with rapid obsolescence consistently favors leasing. Office computers, smartphones, certain medical equipment fit this pattern.

Manufacturing equipment — buy wins

Industrial mixer for food manufacturing: $80,000 cost, 15-year useful life, $10K residual at year 15. $1,200/month lease. Cash purchase: $80K, depreciation ($80K − $10K)/15 = $4,667/year. Tax benefit over 15 years: $4,667 × 15 × 25% = $17,500 Residual at year 15: $10K Net cost: $80K − $17,500 − $10K = $52,500 Lease for 15 years: $1,200 × 12 × 15 = $216,000 (assuming consistent rate; actually leases typically renew at higher rates). After-tax: $216K × 75% = $162,000 Buy wins by $109,500. Durable equipment used long-term consistently favors purchase. Plus: with Section 179 in year 1 (eligible for manufacturing equipment), purchase cost drops to ~$60K immediate net cost ($80K − $20K Section 179 tax benefit). Even more favorable. Industrial equipment, basic machinery, furniture: buy almost always wins financially.

Borderline case — fleet vehicle

Service company commercial van: $45,000 cost, 7-year useful life, $10K residual. $750/month lease for 5 years. Cash purchase: $45K, depreciation ($45K − $10K)/7 = $5K/year. 7-year tax benefit: $5K × 7 × 25% = $8,750 Residual: $10K Net cost: $45K − $8,750 − $10K = $26,250 over 7 years Lease (5 years, then return): $750 × 60 = $45,000. After-tax: $45K × 75% = $33,750 over 5 years. If business needs vehicle for 7 years: would lease 2 separate 5-year cycles or extend. Realistic 7-year lease total: $52K-$60K after-tax. Buy wins for 7-year use case. But Section 179 eligibility (with $20K luxury auto limit for passenger vehicles, larger for true commercial vehicles like vans) further improves purchase economics. Common business pattern: lease vehicles for executives (predictable, includes maintenance), buy work trucks/vans (long-term use, modifications needed, low residual after work use).

When to use this calculator

Use this calculator for major equipment purchase decisions, comparing specific lease offers to purchase alternatives, fleet management planning, or strategic capital allocation discussions.

Pair with commercial-loan (purchase financing math), depreciation-calculator (tax benefit analysis), and cash-flow (capital availability assessment).

Important buy vs. lease considerations:

1. **Section 179 transforms purchase economics.** Up to $1,160,000 immediate expense (2024 limit) for qualifying equipment. Verify eligibility with tax accountant — significantly improves buy case when applicable.

2. **Bonus depreciation also matters.** Additional 60% immediate expense (2024) beyond Section 179 for qualifying property. Combined with Section 179, often allows full year-1 expense of equipment purchase.

3. **Time horizon matters.** Short use (under lease term): leasing often acceptable. Long use (well beyond lease term): buying typically wins despite higher upfront cost.

4. **Technology obsolescence favors leasing.** Computers, certain medical equipment, certain manufacturing technology becomes obsolete quickly. Leasing provides upgrade flexibility.

5. **Cash flow constraints favor leasing.** Leasing preserves capital for working capital or other investments. Capital-constrained businesses often choose lease even when buying is cheaper.

6. **Maintenance inclusion matters.** Many lease structures include maintenance, repairs, support — reducing total lease cost when factored in. Verify what's included.

7. **Lease term flexibility.** Operating leases typically allow return at term end. Provides escape option if equipment no longer needed. Purchases require sale to disposition.

8. **Residual value uncertainty.** Estimated residual may not materialize. Conservative estimates protect against disappointment.

9. **Type of lease matters.** Operating lease (rental-like) vs. capital lease (purchase-like) have very different tax and accounting treatment. Verify structure with accountant before signing.

10. **Total cost of ownership analysis.** Beyond purchase/lease price: maintenance, insurance, training, support, financing costs. Factor all into total cost comparison.

11. **Equipment financing alternatives.** Banks, SBA, equipment finance companies, manufacturer captives. Shop multiple sources — terms vary substantially.

12. **Off-balance-sheet consideration.** Operating leases historically didn't appear on balance sheet (changed by ASC 842 in 2019). Even now, leases impact balance sheet less than equivalent debt-financed purchase. Affects financial ratios and debt covenants.

Common mistakes to avoid

Ignoring Section 179 and bonus depreciation. Significant tax savings make purchase often more favorable than initially appears.
Comparing only monthly payment. Total cost over horizon matters more than monthly outflow.
Forgetting residual value of purchased equipment. Equipment retains value at end of useful life; reduces effective purchase cost.
Optimistic residual value estimates. Conservative estimates protect against disappointment when equipment depreciates faster than expected.
Not factoring maintenance differences. Lease may include maintenance; purchase requires separate budget for repairs over equipment life.
Ignoring opportunity cost of capital. Cash tied up in equipment purchase has alternative uses — factor cost of capital into analysis.

Frequently Asked Questions

Sources & further reading

Section 179 Deduction — U.S. Internal Revenue Service
Equipment Financing Resources — U.S. Small Business Administration
Equipment Leasing Standards — Equipment Leasing and Finance Association

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