Lease or Buy? How Equipment Financing Changes Your Tax
How buying, financing, and leasing equipment or vehicles produce different deductions, and the lease that the IRS treats as a purchase.
Reviewed by the Fairlight Accounting cross-border tax team — U.S. & Canadian Tax Desks
Buying equipment gives you depreciation — often an immediate write-off through Section 179 or bonus depreciation — plus deductible interest if financed. Leasing gives you deductible lease payments spread over the term. The IRS treats some "leases" as purchases, so the label on the contract does not decide the tax result.
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How do the deductions compare?
| Feature | Buy (cash or loan) | True lease |
|---|---|---|
| Deduction | Depreciation, often immediate (Section 179 or bonus) | Lease payments as paid or accrued |
| Interest | Deductible separately on a loan | Built into the payment |
| Timing | Front-loaded | Spread evenly |
| End of term | You own the asset; sale may trigger recapture | Return, renew, or buy at fair value |
| Vehicles over the luxury limits | Depreciation caps (unless over 6,000 lbs gross vehicle weight; Section 179 on heavy SUVs capped at $32,000 for 2026) | "Inclusion amount" reduces the deduction |
| Section 179 | Available to the owner | Not available to the lessee |
When is a lease treated as a purchase?
A contract called a lease is a conditional sale for tax if its economics look like ownership. Revenue Ruling 55-540 lists factors such as:
- a purchase option for a nominal amount (often $1),
- payments that build equity in the asset,
- payments over a short period that make up most of the price needed to acquire title,
- rent that materially exceeds fair rental value, or
- part of each payment designated as, or easily recognized as, interest.
If so, you depreciate the asset and deduct the implied interest, rather than deducting payments as rent. Many "$1 buyout" equipment leases fall into this category; fair-market-value leases usually do not.
Which is better for taxes?
Neither in general. Buying front-loads deductions, which is useful in high-income years, especially now that P.L. 119-21 permanently restored 100 percent bonus depreciation for property acquired after January 19, 2025. For 2026, Section 179 expensing is capped at $2,560,000, reduced dollar for dollar once qualifying purchases exceed $4,090,000 ($2,500,000 and $4,000,000 for 2025). Leasing keeps deductions level and preserves cash, which can matter more for growing businesses. Compare after-tax cost: payments, tax savings by year, and the value at the end of the term.
What happens when you dispose of the asset?
Selling owned equipment produces depreciation recapture — gain up to the depreciation claimed is ordinary income. A trade-in is a sale; like-kind exchanges of equipment are no longer available. Returning a leased asset has no tax effect beyond any end-of-lease charges, which are deductible.
Frequently asked questions
Can I deduct equipment bought on a loan before I pay it off?
Yes. Depreciation, including Section 179 and bonus depreciation, is based on cost when the asset is placed in service, regardless of financing.
Is a vehicle lease better for tax than buying?
For cars under the luxury depreciation caps, the difference is often modest. Heavy SUVs and trucks over 6,000 pounds usually favor buying because of large first-year deductions.
Can a sale-leaseback create a deduction?
Selling an asset and leasing it back can convert value into deductible rent, but the sale is taxable and the arrangement must have substance.
Does the business-use percentage matter?
Yes, for both. Only the business share of depreciation or lease payments is deductible, and vehicles and other listed property must be used more than 50 percent for business to qualify for Section 179 or bonus depreciation.
Official sources
The IRS explains: “P.L. 119-21, commonly known as the One Big Beautiful Bill Act, reinstated the 100% special depreciation allowance for certain qualified property acquired and placed in service after January 19, 2025 (including long production period property and certain aircraft), and certain specified plants bearing fruits and nuts planted or grafted after January 19, 2025.” — Internal Revenue Service, Publication 946 (2025), How To Depreciate Property, https://www.irs.gov/publications/p946
The IRS explains: “If you lease a car, truck, or van for 30 days or more, you may have to reduce your lease payment deduction by an “inclusion amount,” explained next.” — Internal Revenue Service, Publication 463 (2025), Travel, Gift, and Car Expenses, https://www.irs.gov/publications/p463
Next step
Fairlight Accounting handles U.S. domestic, cross-border (U.S.–Canada), and international tax returns, plus bookkeeping, payroll, and CFO advisory. Our U.S. Tax Desk compares lease and purchase offers on an after-tax basis before you sign. See pricing or book a free fit call.
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