Equipment Lease vs. Buy Calculator — Section 179, After-Tax Cost & ROI

How to Use the Equipment Lease vs. Buy Calculator

1. Enter the equipment cost, estimated useful life in years, your business tax rate (federal + state combined), and your discount rate (cost of capital or required return on investment).
2. Fill in the Buy Scenario: down payment, loan interest rate, and loan term. The calculator auto-computes monthly payment and total interest.
3. Enter your business taxable income — Section 179 cannot exceed this amount (IRC §179(b)(3)); any equipment cost above the limit automatically routes to bonus depreciation, which has no income cap. Enter the Section 179 deduction amount — leave 0 to apply the full equipment cost (capped by the IRS annual limit and your taxable income). Set the bonus depreciation percentage (100% for tax year 2026 under the One Big Beautiful Bill Act).
4. Enter the Lease Scenario: monthly payment, lease term in months, any upfront deposit, and the lease type (operating or capital/$1-buyout). Lease type determines how payments are deducted for tax purposes.
5. Click Calculate — the tool instantly computes after-tax, net-present-value costs for both options, shows the recommended choice, and displays a year-by-year cash flow comparison table.
6. Adjust assumptions (tax rate, discount rate, bonus depreciation %) to model different scenarios. The results update immediately.
7. Use Print / PDF to save the analysis for board presentations, lender meetings, or your accountant.

Understanding the Key Concepts

Why use NPV (Net Present Value) for this comparison? Equipment financing decisions involve cash flows spread over multiple years. A dollar paid in Year 3 is worth less than a dollar paid today because money has earning potential (time value of money). NPV analysis discounts all future cash flows back to today's value using your discount rate — giving you a true apples-to-apples comparison. The option with the lower NPV cost is the cheaper choice in real economic terms, even if the raw payment totals are misleading.

Section 179 Deduction is a powerful IRS provision (Tax Code Section 179) that allows businesses to deduct the full purchase price of qualifying equipment or software in the year it is placed in service — rather than depreciating it over multiple years. For tax year 2026, the Section 179 deduction limit is $2,560,000 (subject to dollar-for-dollar phase-out when total purchases exceed $4,090,000, reaching $0 at $6,650,000), per IRS Rev. Proc. 2025-32 reflecting the One Big Beautiful Bill Act (OBBBA §70306). Critically, the Section 179 deduction is also limited to your aggregate business taxable income for the year (IRC §179(b)(3)) — you cannot use it to create a loss; any disallowed amount carries forward. Eligible property includes machinery, vehicles (with limits), computers, office furniture, and certain improvements. The impact is significant: a $100,000 equipment purchase with a 25% tax rate generates a $25,000 tax saving in Year 1 alone if fully expensed (via Section 179 plus 100% bonus on any income-limited remainder), versus roughly $5,000 per year under straight-line depreciation over five years.

Bonus Depreciation (also called first-year additional depreciation under IRC Section 168(k)) allows businesses to immediately deduct a percentage of the cost of qualifying property. Bonus depreciation applies to the remaining basis after Section 179 is applied. Under the Tax Cuts and Jobs Act (TCJA), bonus depreciation was 100% through 2022, then phased down to 80% in 2023, 60% in 2024, and 40% in early 2025. The One Big Beautiful Bill Act (OBBBA §70301) then permanently restored 100% bonus depreciation for qualified property acquired after January 19, 2025 — so for 2026 the rate is 100%, not the 20% the old TCJA schedule had projected. Unlike Section 179, bonus depreciation has no taxable-income limitation and can create or increase a net operating loss, making it available to businesses that are not yet profitable — which is exactly why income-limited Section 179 amounts are routed to bonus.

After-Tax Cost of Buying: When you buy equipment, the total cost includes down payment, loan principal and interest payments, minus the tax benefit from depreciation deductions (Section 179, bonus, and remaining straight-line depreciation reduce your taxable income) and interest deductions (loan interest is a deductible business expense). At the end of the useful life, you may recover some value through sale of the equipment (salvage value), which is also accounted for on an after-tax basis. This calculator computes the present value of all these cash flows.

After-Tax Cost of Leasing: Lease treatment depends on the lease classification. An operating lease (the traditional lease structure where you return the equipment at end of term) allows you to deduct the full lease payment as a business operating expense in the year paid — similar to rent. A capital lease (also called a finance lease or $1 buyout lease) is treated more like a purchase: you take depreciation on the asset and deduct the interest portion of the implied financing cost, but cannot deduct the full payment as an expense. Operating leases generally have better tax treatment year-over-year but forgo ownership and its associated benefits.

Lease vs. Buy: When Leasing Wins: Leasing is typically more advantageous when the equipment becomes obsolete quickly (technology, medical devices), when the business values cash flow conservation, when the company has limited credit for a purchase loan, or when off-balance-sheet treatment under operating lease accounting is important. Leasing also avoids the risk of owning obsolete equipment — you simply upgrade at lease end.

Lease vs. Buy: When Buying Wins: Buying is typically better when the business has a high effective tax rate (maximizing depreciation savings), when Section 179 and bonus depreciation dramatically reduce Year 1 cost, when the equipment has a long useful life and high residual value, when the business wants to build equity in the asset, or when cash flow is strong enough to handle loan payments without strain. Long-term equipment with stable technology (manufacturing machinery, heavy equipment) often favors buying.

Section 179 & Bonus Depreciation Quick Reference (2026)

• Section 179 Limit: $2,560,000 (2026); phases out dollar-for-dollar above $4,090,000 in total purchases, reaching $0 at $6,650,000 (IRS Rev. Proc. 2025-32 §4.24)
• Bonus Depreciation Rate: 100% in 2026 — permanently restored by the One Big Beautiful Bill Act (OBBBA §70301) for property acquired after January 19, 2025
• Note: the old TCJA phase-down (which had projected 20% for 2026) was superseded by OBBBA; the rate is 100% again
• Section 179 vs. Bonus: Section 179 is capped at business taxable income (IRC §179(b)(3), excess carries forward); bonus depreciation has no income limitation and can create a loss — so this calculator routes the income-limited Section 179 remainder into bonus
• Qualifying Property: Tangible personal property (machinery, equipment, computers, vehicles under 6,000 lbs) placed in service during the year
• Vehicles: Passenger vehicles have separate luxury auto limits; heavy SUVs over 6,000 lbs GVWR qualify for Section 179 up to $32,000 in 2026 (Rev. Proc. 2025-32)
• State Tax: Not all states conform to Section 179 or bonus depreciation — check your state rules and enter your combined effective rate above

Frequently Asked Questions

• Should I always take the full Section 179 deduction?
  Section 179 is generally beneficial, but there are exceptions. Section 179 is limited to your business taxable income for the year — you cannot take a deduction larger than your profit (unlike bonus depreciation). If you anticipate higher income in future years, it may be more tax-efficient to spread depreciation to offset future higher-rate income rather than take all of it now. In most cases, however, immediate expensing under Section 179 wins because of time value of money — a tax dollar saved today is worth more than a tax dollar saved in year 5.
• How is bonus depreciation different from Section 179?
  Both allow accelerated deductions on qualifying equipment, but they work differently. Section 179 is capped at taxable business income (IRC §179(b)(3)) and has an annual dollar limit ($2.56M for 2026, phasing out above $4.09M in purchases). Bonus depreciation (100% in 2026 under OBBBA) has no taxable income limitation — it can create or increase a net operating loss (NOL) which can be carried forward to offset future income. For most small businesses, Section 179 is applied first, then bonus depreciation applies to any remaining basis. This calculator follows that ordering: it caps Section 179 at the lesser of the equipment cost, the statutory/phase-out limit, and your taxable income, then routes the remaining basis to bonus depreciation.
• What discount rate should I use?
  The discount rate represents your cost of capital — the return you could earn by deploying that money elsewhere in your business. Common approaches: use your weighted average cost of capital (WACC), use your borrowing rate (loan interest rate), or use an internal hurdle rate (minimum acceptable return on investment). For most small businesses, 6–12% is a reasonable range. A higher discount rate makes future payments worth less today, which generally favors leasing (smaller upfront commitment) in the NPV comparison.
• What is an operating lease vs. a capital/finance lease?
  An operating lease is treated as an expense — like renting equipment. Payments are fully deductible as operating expenses. At the end of the lease, you return the equipment. No asset or liability appears on your balance sheet under ASC 842 for private companies using simplified treatment. A capital lease (GAAP: finance lease) is treated like a purchase — the asset and corresponding liability appear on your balance sheet. Deductions come from depreciation and the implied interest in the lease payments, not the full payment amount. Most equipment finance leases with a $1 buyout option are classified as finance leases.
• Does this calculator handle used equipment?
  Yes — enter the actual purchase price of the used equipment. Note that for Section 179 and bonus depreciation, used equipment placed in service after 2017 generally qualifies for these deductions (the TCJA expanded bonus depreciation to used property). The tax treatment is the same as new equipment for the purposes of this calculator.
• Why does the calculator show a different result than my accountant's estimate?
  This calculator uses simplified modeling: straight-line depreciation on the remaining basis after Section 179 and bonus, monthly loan amortization with daily/monthly interest, and a constant annual discount rate. Your accountant may use MACRS (Modified Accelerated Cost Recovery System) depreciation schedules, which follow an IRS-prescribed accelerated pattern over the asset's recovery period (5 years or 7 years for most equipment). MACRS generally provides slightly larger early-year deductions than straight-line. Use this calculator for strategic decision-making; rely on your CPA for exact tax return preparation.