When your business needs a truck, a machine or a computer system, you can usually spread the cost in one of three ways: an equipment loan, a $1 buyout lease or a fair market value (FMV) lease. They look similar, since each is a monthly payment, but they differ in total cost, ownership, taxes and what happens at the end.
This guide compares the three, shows how to turn a lease quote into an APR, and explains when each makes sense.
The three options
| Equipment loan | $1 buyout lease | FMV lease | |
|---|---|---|---|
| Who owns it | You, from day one | You, after the last payment plus $1 | The leasing company |
| Upfront cost | Often 10%–20% down | Often the first and last payments | Often the first payment |
| Monthly payment | Medium | Medium to high | Lowest |
| End of term | You own it outright | You own it for $1 | Return it, renew, or buy it at fair market value |
| Taxes | Depreciation or Section 179 | Usually treated like a purchase | Payments usually deducted as a business expense |
| Best for | Long-lived equipment | Owning with little cash up front | Equipment that becomes outdated quickly |
A 10% purchase option lease sits between the two leases: the payments are lower than a $1 buyout lease, and you can buy the equipment at the end for 10% of its original cost.
A worked example: a $60,000 machine
Suppose these are your quotes:
- Loan: 10% down ($6,000), then $54,000 at 9% for 60 months, or $1,121 a month. You pay about $73,260 in total, including the down payment.
- $1 buyout lease: no down payment and 60 payments of $1,350. You pay $81,000 in total.
- FMV lease: 36 payments of $1,050. You pay $37,800 in total, and you don’t own the machine at the end.
Turn the lease into an APR
Every lease payment has an interest rate built in. To find it, solve for the rate at which the payments exactly repay the equipment’s price, the same math as a loan’s APR.
The $1 buyout lease above works out to about 12.5% APR, compared with 9% for the loan. The lease costs about $7,740 more over five years but needs no down payment. Whether that’s worth it depends on what else the $6,000 could do for your business. Our equipment loan calculator works out payments and APR for any quote.
An FMV lease is harder to compare, because the leasing company expects to get the equipment back and sell or re-lease it. Compare its total payments with what it would cost to own similar equipment for the same period, and read the end-of-term conditions carefully.
Taxes: Section 179 and lease deductions
The tax treatment often settles the question. The rules depend on the exact contract, so check with your tax advisor.
- Loans and $1 buyout leases are generally treated as purchases. You own the equipment for tax purposes and can depreciate it. You may be able to deduct the full cost in the first year with Section 179 or bonus depreciation, even though you pay over five years.
- FMV leases that are true leases are generally treated as rentals: you deduct the payments as you make them.
In the example, a business in the 24% federal bracket that deducts the full $60,000 under Section 179 in the first year could cut that year’s federal income tax by about $14,400, if it has enough taxable income. Under the FMV lease, it would deduct $12,600 of payments a year, worth about $3,024 a year.
The 2025 tax law raised the Section 179 limit to $2.5 million and permanently restored 100% bonus depreciation for qualifying property acquired after January 19, 2025. Section 179 vs. bonus depreciation explains which to use.
When leasing makes sense
- The equipment becomes outdated quickly, like computers or some medical and technology equipment.
- You need it for a limited time or a specific contract.
- You want to conserve cash, or your credit won’t support a loan with a down payment.
- The lease includes maintenance or upgrades you value.
When buying makes sense
- The equipment has a long useful life and holds its value, like trucks, trailers and heavy machinery.
- You want to build equity and keep or sell the equipment later.
- You can use Section 179 or bonus depreciation against taxable income.
- You can get a lower rate from a bank, a credit union or an SBA program. SBA 504 loans offer long-term financing for major fixed assets, including heavy equipment.
Read the fine print
Before you sign a lease or a loan, check:
- End-of-lease terms: automatic renewals, notice deadlines, return shipping and condition standards, and how “fair market value” is set.
- Non-cancelable clauses: most equipment leases require every payment even if the equipment breaks down. Any warranty claim is between you and the manufacturer.
- Fees: documentation, origination and late fees all raise the true cost.
- Prepayment terms: whether paying early saves interest.
- Personal guarantees and required insurance.
Avoid expensive substitutes
Fast, unsecured financing such as a merchant cash advance almost always costs more than financing secured by the equipment itself. If you’re offered an advance to buy equipment, compare it with an equipment loan in APR terms using our merchant cash advance calculator.
Sources:
- IRS Publication 946, How To Depreciate Property (Section 179, bonus depreciation and leased property)
- SBA, 504 loans
- SBA, Loans: funding programs for small businesses
Key terms
- Bonus depreciation
- Buyout lease ($1 buyout lease)
- Fair market value (FMV) lease
- Section 179 deduction