Find Me Funders
Equipment loan versus equipment lease: what actually changes
Ownership, the end of the term and the tax return are three separate questions, and the structure you sign answers all three at once.
Drafted with AI assistance. Not yet independently checked. Nobody has verified the claims on this page against a source, so treat the figures and legal points as a starting point rather than as settled, and confirm anything you are about to act on. How we check things.
A loan buys the machine. A lease rents it, sometimes with a path to owning it at the end. Every other difference — the tax return, the balance sheet, what happens in month 38 when the equipment is obsolete — falls out of that one.
Who owns it while you are paying
With an equipment loan you own the machine from the day it is delivered. The funder takes a security interest in it, files a UCC-1 financing statement, and, if the asset carries a certificate of title, has its lien noted on the title. The asset sits on your books. You depreciate it. You cannot sell it clean until the lien is released.
With a lease, the lessor owns the equipment and you hold the right to use it for the term of the schedule. At the end you hand it back, buy it, or renew, depending on what the document says. Some leases are purchases wearing a lease costume, which is where the tax question starts.
What the end of the term looks like
This is the part that gets skipped in the sales conversation, and it is the part that costs money.
Why the tax treatment is not the same
The label on the document does not decide the tax result. The substance does. Broadly:
- A true lease, usually an FMV structure, is rent. You deduct the payments as a business expense across the term. You are not the tax owner, so depreciation and the section 179 election are not yours to take.
- A conditional sale dressed as a lease — the $1-out, and often the 10% PUT — is treated as a purchase. You are the tax owner, you depreciate the equipment, and expensing elections may be available to you.
- A loan is a purchase outright. The interest portion is deductible, the principal is not, and you depreciate the asset.
Expensing limits under section 179 and the bonus depreciation percentage under section 168(k) are both moving targets — one is indexed for inflation, the other has been on a legislated schedule. Do not accept a figure from a brochure or a sales email. Check the current numbers at irs.gov and read the depreciation rules in Publication 946.
The IRS looks past the label to who carries the burdens and benefits of ownership; its published lease-characterisation guidance, of which Revenue Procedure 2001-28 is the usual reference point, is one place those tests are written down. Put the question to your CPA before you sign. The structure is far easier to choose than to change.
The off-balance-sheet pitch is mostly dead
Salespeople still say a lease keeps the obligation off your balance sheet. Under current US GAAP that argument has largely gone: ASC 842 puts operating leases on the balance sheet as a right-of-use asset and a matching lease liability. Presentation differences remain, and they can still matter to a covenant. Ask your accountant whether your bank line measures funded debt, total liabilities, or fixed-charge coverage, because those three treat a lease very differently. If you do not report on GAAP at all, none of this touches you.
Cost is not the same as rate
An equipment loan is normally quoted as a rate. A lease is normally quoted as a payment, or as a lease rate factor — a decimal you multiply by equipment cost to get the monthly payment. Those are not comparable as quoted. Convert everything to total dollars paid across the term, plus whatever you must pay at the end to own the asset, and compare that.
Illustrative only — on a $100,000 machine over 60 months at an assumed 7% nominal rate, a $1-out structure runs about $1,980 a month, which is $118,800 in payments plus the dollar. An FMV structure priced on a 20% residual at the same assumed rate runs about $1,700 a month, which is $102,000 across the term — but you own nothing at the end unless you pay what the machine is worth then. Those figures are constructed to show the shape of the comparison. They are not quotes.
Five questions before you sign
- Is this a loan, a true lease, or a conditional sale? Ask for the answer in writing.
- What do I owe at the end, and on what date is that amount decided?
- Is there an end-of-term notice requirement, and how many days?
- Who insures it, who pays personal property tax on it, and who files that return?
- What are the documentation, filing and end-of-term administrative fees, in dollars?
The last one catches people. Fees that look trivial next to a six-figure machine are still real money, and they are almost always written down somewhere. Ask for the full schedule before you commit, not after.
Where this applies
Related questions
What does this guide cover?
Ownership, the end of the term and the tax return are three separate questions, and the structure you sign answers all three at once.
Which funding products does this apply to?
Term Loan, Equipment Financing. Each has its own page listing the funders in this directory that offer it and what each one publishes about its terms.
Is this specific to construction?
It is written around how a construction business actually generates and collects cash, which is what makes its funding problem different. The mechanics transfer; the arithmetic may not.
Who writes this?
The Find Me Funders research desk. Some drafting is AI-assisted, and every page that is says so at the top, including whether a person has checked its claims yet.
How do I know a figure here is right?
Where a page carries the green notice, its claims were checked against the sources listed at the end and a reviewer is named. Where it carries the amber one, nobody has verified it yet and you should confirm anything you plan to act on.
Are the examples real deals?
No. Every worked example is labelled illustrative and exists to show the arithmetic. What any particular lender charges is on that lender's page, where it publishes it.
Why do you never say what a typical rate is?
Because we cannot source it. A market average assembled from lenders who do not publish prices is a guess with a decimal point on it. Where a lender publishes a figure, we show that figure and say where it came from.
Is this financial or legal advice?
No. It is general information about how these products work. Outcomes depend on your contract and your state, and a lawyer or accountant licensed where you are is the person to ask about your situation.
Can I reuse this content?
Quote a paragraph with a link back. Do not republish whole articles.