Asset Acquisition Strategies: Choosing Between Financing, Leasing or Buying

When acquiring business equipment or machinery, how you choose to pay can significantly impact your cash flow, tax strategy and long-term financial position. The three primary optionsare financing, leasing and buying outright. Each has its own set of advantages and disadvantages.

Financing

Financing allows your business to spread out the cost of equipment over time while gainingownership and building equity as you pay down the loan. From a tax perspective, financed equipment may qualify for valuable deductions, including interest payments, sales tax and depreciation. Under the current rules, businesses can deduct up to $1,250,000 in equipment costs under Section 179 in the year the asset is placed in service (2025 limit), plus take advantage of 40% bonus depreciation on eligible assets. However, financing typically requires a larger down payment than leasing and adds liabilities to your balance sheet, which may negatively impact debt covenant ratios. It’s also important to consider the rate of depreciation. If the asset loses value quickly, you could end up owing more than it’s worth.

Buying Outright

Purchasing equipment upfront gives you full ownership immediately, with no ongoing payments and interest. It’s a good option when your cash flow is strong and interest rates are high. You’ll qualify for the same tax benefits as financing, including Section 179 and 40% bonus depreciation. However, the significant upfront cost can reduce liquidity and limit investments in other areas. As the owner, you are responsible for all maintenance, repairs and other costs associated with the asset over time.

Leasing

Leasing provides flexibility with typically lower monthly payments since you’re only covering the equipment’s depreciation during the lease term. Many leases include maintenance, reducing additional out-of-pocket costs. The downside is that you don’t own the asset, and lease agreements may come with usage restrictions. Under accounting standard ASC 842, operating leases must be reported on the balance sheet, potentially affecting debt covenants. Lease payments and related sales tax are tax-deductible, though the tax is typically paid upfront and amortized over the lease term.

Choosing the Right Option

Your decision should align with your business’s financial health, tax position and future plans. If cash preservation and flexibility are priorities, leasing may be ideal. If long-term ownership and value are more important, buying or financing may be the better path.

Every option has pros and cons. To ensure your decision supports your broader business strategy and complies with tax and accounting rules, consult a qualified advisor.

John Archambeault, CPA, is an Audit Manager at Dannible & McKee, LLP, a Syracuse-based public accounting firm that has been delivering expert tax, audit, accounting, valuation and consulting services since 1978. For more information on this topic, contact John at jarchambeault@dmcpas.com. To learn more about Dannible & McKee, please visit DMCPAS.COM.