US small businesses lease everything from excavators and delivery vans to MRI machines and server racks. The lease vs buy decision is not about which monthly payment looks lower—it is about net present value (NPV), tax treatment, how long you will keep the asset, and what happens at end of term. This guide pairs with the free equipment lease vs buy and lease buyout calculators on Fynvorax so you can model cash flows before you sign a master lease agreement or a buyout letter from the lessor.
Not accounting or legal advice Section 179 limits, bonus depreciation, sales tax on leases, and operating vs capital lease classification change by entity, state, and contract. Use these tools for planning math and confirm classification with your CPA and attorney.
Operating lease vs finance lease (plain English)
An operating lease is closer to renting: you use the asset for part of its life and return it (or buy at residual). Payments are often fully deductible as operating expenses. A finance (capital) lease transfers most ownership risks and rewards—you may depreciate the asset and show debt on the balance sheet under ASC 842. Lessors label contracts differently; read the bargain purchase option, term length vs useful life, and who pays maintenance before you assume OPEX vs CAPEX treatment.
NPV: the number that should drive the decision
NPV discounts all future cash flows—lease payments, loan payments, maintenance, insurance, tax benefits, and residual value—to today's dollars using your hurdle rate (often 8–12% for small business, or your weighted average cost of capital). Leasing wins on NPV when you need flexibility, upgrade on a fixed cycle, or preserve a credit line for payroll and inventory. Buying wins when you will run the asset well past loan payoff and capture resale or continued use value. Comparing only the first 48 months of a 10-year useful life asset skews toward leasing; extend the analysis horizon to match how long you realistically keep the unit.
Example: construction equipment (USD)
Purchase price $85,000; 48-month lease at $1,450/month with $12,000 buyout option.
Buy path: $17,000 down, 7% loan over 48 months ≈ $1,620/month plus maintenance.
Lease NPV may look better if you return the machine after the job and avoid resale hassle.
Buy NPV wins if you keep the excavator 8+ years after payoff and sell for $25,000+.
Section 179 and bonus depreciation (buy side)
Qualifying equipment purchases may be expensed under Section 179 up to annual limits (subject to profitability and phase-outs) or depreciated with bonus depreciation in the purchase year. That front-loads tax savings on the buy path. Lease payments, meanwhile, are often deductible as they are paid—helpful when you want to smooth deductions with cash outflows. Enter the tax benefit assumptions your CPA gives you into the calculator; defaults are educational only.
End-of-lease buyout: residual vs market
Three months before return, the lessor sends a buyout quote (residual). Compare that number to fair market value from used-equipment dealers or auction listings. When buyout is below market—common if residual was set conservatively at lease inception—purchasing can be rational even if you planned to return the asset. When buyout exceeds market, negotiate, return the unit, or buy elsewhere. Model optional buyout financing APR separately; end-of-term equipment loans sometimes price higher than new-equipment paper.
Common mistakes on lease vs buy spreadsheets
Matching lease payment to loan payment without residual, buyout, or return fees.
Ignoring excess hour or mileage charges at inspection.
Using a 3-year horizon for a 7-year asset.
Forgetting insurance, property tax (if applicable), and maintenance on the buy side.
Assuming Section 179 applies without checking asset class and entity limits.
Checklist before you sign
Run NPV with your actual discount rate, not the lessor's marketing rate.
Get maintenance and insurance responsibilities in writing.
Confirm early termination and buyout formulas in the lease schedule.
If near lease end, compare buyout quote to two independent used quotes.
Stack with S-Corp or entity tax planning if the asset is for a pass-through business.