Finance equipment you plan to keep past its payoff date and that holds its value, like trucks, machinery, or kitchen equipment. Lease equipment that goes obsolete fast or that you'll replace within a few years, like computers or some medical technology. Financing costs more per month but builds ownership. A fair-market-value lease costs less monthly but leaves you owning nothing.
Taxes can tip the decision. Financed equipment and some leases qualify for Section 179 expensing, which for 2026 lets a business deduct up to $2,560,000 of qualifying equipment in the year it's placed in service. More on that below, and as general education only.
What is the difference between equipment financing and leasing?
With equipment financing, you borrow to buy the equipment and own it from day one. The equipment secures the loan, and when the last payment is made, the lien is released. With a lease, the lessor owns the equipment and you pay to use it for a set term.
| Equipment financing | Equipment lease (fair market value) | |
|---|---|---|
| Who owns it | You, from day one | The lessor |
| Monthly payment | Higher | Lower |
| Upfront cost | Sometimes a down payment; some lenders finance up to 100% | Often first and last payment |
| End of term | You own it outright | Return it, renew, or buy at fair market value |
| Tax treatment | Depreciation or Section 179 on the purchase; interest is deductible | Lease payments generally deducted as a business expense |
| Upgrading | Sell or trade in yourself | Return and lease newer equipment |
| Best for | Long-lived, value-holding assets | Fast-depreciating or frequently replaced assets |
What are the two main types of equipment lease?
Not all leases work alike. The end-of-term option decides what you're really signing.
Fair market value (FMV) lease. Lower payments, and at the end you can return the equipment, renew, or buy it at its then-current market value. This is a true lease: you're paying for use, not ownership.
$1 buyout lease. Payments are close to a loan's, and you buy the equipment for $1 at the end. For tax purposes, it's generally treated as a purchase, not a rental. Functionally, it's financing with a lease label.
A 10% purchase option lease sits between the two, with a fixed buyout at 10% of the original cost.
Which costs less over five years: financing or leasing?
Here's a hypothetical comparison for a $100,000 CNC machine used for five years. The rates and payments are illustrative only, not quotes. Actual terms depend on the lender, the equipment, and your business.
- Financing: 100% financed over 60 months at an illustrative 10% APR, about $2,125 per month
- $1 buyout lease: an illustrative $2,150 per month for 60 months
- FMV lease: an illustrative $1,750 per month for 60 months
- Machine's assumed market value after five years: $40,000
| Option | 60-month payments | End-of-term cost | You own it? | Net cost after subtracting $40K value |
|---|---|---|---|---|
| Finance | $127,500 | $0 | Yes | $87,500 |
| $1 buyout lease | $129,000 | $1 | Yes | $89,001 |
| FMV lease, return it | $105,000 | $0 | No | $105,000 |
| FMV lease, buy it out | $105,000 | $40,000 | Yes | $105,000 |
If you'll use the machine beyond five years, financing comes out about $17,500 ahead in this example. The FMV lease saves $375 a month, but you pay for that when the term ends.
The math changes when the equipment loses value quickly. If the machine were worth $10,000 after five years instead of $40,000, financing's net cost rises to $117,500 and the FMV lease becomes about $12,500 cheaper. That's the case for leasing laptops, servers, and anything likely to be outdated before the term ends.
How does Section 179 work in 2026?
This section is general education, not tax advice. Talk to your tax professional before you make a purchase decision based on a deduction.
Section 179 of the tax code lets a business deduct the full cost of qualifying equipment in the year it's placed in service, instead of depreciating it over several years. The One Big Beautiful Bill Act, signed in 2025, raised the limits and indexes them to inflation. For tax years beginning in 2026, IRS Revenue Procedure 2025-32 sets them at:
| 2026 Section 179 item | Limit |
|---|---|
| Maximum deduction | $2,560,000 |
| Phase-out threshold (total qualifying equipment placed in service) | $4,090,000 |
| Cap on SUVs | $32,000 |
Above the phase-out threshold, the maximum deduction shrinks dollar-for-dollar. A business placing $4,190,000 of equipment in service in 2026 would have its limit reduced by $100,000, to $2,460,000.
A few rules matter most for small businesses:
- Financing doesn't reduce the deduction. You can deduct the full purchase price even if you've made only a few payments. That's the main tax argument for financing over a true lease.
- The equipment must be placed in service during the tax year. Ordered in December but delivered in January means next year's deduction.
- It must be used more than 50% for business.
- The deduction can't exceed your taxable business income. Any excess carries forward to future years.
- State rules vary. Some states don't follow the federal limits.
A hypothetical Section 179 example
Say a machine shop finances the $100,000 CNC machine above and places it in service in March 2026. If it has enough business income and elects Section 179, it may deduct the full $100,000 on its 2026 return. At a hypothetical 24% marginal tax rate, that's about $24,000 in reduced federal tax. Meanwhile, its 2026 payments total roughly $21,250 for 10 months. In this illustration, the first-year tax savings exceed the first-year payments. Your results will depend on your entity type, income, and state.
Does Section 179 apply to leased equipment?
Generally, it depends on the lease type.
- FMV (true) lease: the lessor owns the equipment, so you usually can't take Section 179. You typically deduct the lease payments as a business expense as you pay them.
- $1 buyout lease: usually treated as a purchase, so Section 179 may apply, just as with financing.
What about bonus depreciation?
The same 2025 law permanently restored 100% bonus depreciation for qualifying property acquired after January 19, 2025. Bonus depreciation has no dollar cap and isn't limited to taxable income the way Section 179 is. Businesses often use the two together. Which one suits you is a question for your tax professional.
When does leasing make more sense?
- The equipment becomes outdated within three to five years, such as computers, point-of-sale systems, or some diagnostic technology.
- You need the lowest possible monthly payment right now.
- You want to upgrade on a schedule without selling used equipment.
- The lease bundles maintenance you'd otherwise pay for separately.
- You don't have enough taxable income to benefit from Section 179 this year.
One older argument is weaker than it used to be: under current U.S. accounting rules (ASC 842), most leases longer than 12 months now appear on the balance sheet, so leasing no longer keeps obligations off your books.
When does financing make more sense?
- The equipment will be useful well beyond its payoff date, such as trucks, trailers, heavy machinery, or commercial kitchen equipment.
- It holds resale value you want to keep.
- You want to deduct the full cost in 2026 under Section 179 or bonus depreciation.
- You'll use it heavily or modify it, which leases often restrict.
- You want the payments to end.
For very large purchases, an SBA 504 or 7(a) loan can offer longer terms, though the process takes longer. If you're buying several smaller items or want one loan to cover equipment plus setup costs, a term loan is another route, though it usually leans more on your credit and cash flow.
What do lenders look for in equipment financing?
Because the equipment secures the loan, its value carries much of the underwriting weight. Sagamore's lending partners finance new and used equipment, sometimes up to 100% of its value, with amounts from $10K to $5M. They generally look for:
- A credit score of 500 or higher
- At least 4 months in business
- $5,000 or more in monthly deposits
- Equipment with a clear fair market value
Have a vendor quote or invoice ready, along with recent bank statements. When you know what you want to buy, you can start an application and compare financing offers against the lease quote from your vendor.
