Financing vs. Leasing vs. Buying: Which Option Is Right for Your Business?

When acquiring assets such as machinery and equipment, the decision on how to pay for them is crucial, as it can significantly impact your cash flow, tax strategy and long-term financial position. The three primary options are financing, leasing and buying outright. Each has its own set of advantages and disadvantages.

Financing

There are a few key advantages to financing, including having ownership of the asset purchased and equity buildup as you pay down the principal balance on the loan. There are downsides to financing as well. Generally, higher down payments are required with financing than with leasing. Depreciation can be another disadvantage, especially if the machinery or equipment depreciates quickly, potentially leaving you in a situation where the outstanding loan balance exceeds the equipment’s market value. Furthermore, financing increases the company’s liabilities, which could affect certain debt covenant ratios. For tax purposes, whether you are buying or financing, you can deduct the interest payments on the loan used to purchase the equipment, as well as the sales tax.

Buying Outright

Purchasing assets outright provides the benefits of obtaining full ownership immediately, no ongoing payments and no interest expense. The most significant disadvantage of buying is the upfront cost, which requires cash outlay at the time of purchase. This could limit your company’s ability to invest in other areas. Additionally, as the owner, you are responsible for all maintenance, repairs and other costs associated with the asset over time. This option can be especially attractive when the company’s cash flow is strong, and interest rates are high.

For tax purposes, whether you are buying or financing, you can claim depreciation deductions. Currently, section 179 expense allows the business to deduct the full cost of eligible equipment in the year it is placed in service, up to limits, which is $1,250,000 for 2025. Bonus depreciation allows a 40% deduction in 2025 for qualifying equipment, though this will decrease to 20% in 2026 and phase out completely in 2027. Sales tax can also be deducted when buying.

Leasing

Leasing provides flexibility with lower monthly payments compared to financing, as you are only paying for the asset’s depreciation over the lease term. There may also be lower maintenance costs, as many lease agreements often cover maintenance and repairs. The disadvantages of leasing include the lack of ownership of the asset. Lease agreements may also impose restrictions on usage, limiting how and when the equipment can be used.

When considering leasing, you need to think about how this could affect the liabilities on the company’s financial statements. This is due to the recent accounting standard ASC 842, which requires companies to capitalize operating leases as right-of-use assets. This can affect specific debt covenant ratios the company may have for existing financing. You should analyze how this will affect those ratios to make sure the company will still be in compliance after entering into the new lease.

From a tax standpoint, you can deduct the cost of monthly lease payments and reduce your taxable income, as well as the sales tax associated with the lease. However, the tax is paid upfront and spread out over the time of the lease payments.

Making the Right Choice

Each option has its pros and cons, and the best choice depends on your company’s financial position, tax situation and long-term goals. If preserving cash flow is a priority, leasing may be the best route. If ownership and long-term cost savings are more important, buying or financing might be the better option.

Navigating these decisions can be complex, and understanding the tax implications and financial impacts is crucial. If you have questions about which option is best for your business, contact us to discuss your specific needs and find the best solution.

Contributing author: John Archambeault, CPA, is an audit manager with experience managing multiple engagement teams through the performance of audits, reviews, compilations, and other attest services to a wide range of clients, including manufacturing, construction, architectural and engineering and non-profit industries. If you have questions, contact John at jarchambeault@dmcpas.com.