The Three Primary Lease Types
1. The $1 Buyout (Capital Lease)
This is essentially a loan disguised as a lease. At the end of the term, you pay exactly $1 to own the equipment.Best for: Long-lived assets like manufacturing machinery or heavy equipment that you intend to keep for a decade.
2. The 10% Buyout (Hybrid)
You pay a lower monthly rate than a $1 buyout, and at the end of the term, you have the option to buy the equipment for 10% of its original cost.Best for: Balancing monthly cash flow with a clear path to ownership.
3. Fair Market Value (Operating Lease)
This offers the lowest monthly payments. At the end of the term, you can return the equipment, renew the lease, or buy the equipment at its current market price.Best for: Technology (servers, laptops) or medical equipment that becomes obsolete quickly.
Section 179: The Business Owner's Secret Weapon
Section 179 of the IRS tax code allows businesses to deduct the full purchase price of qualifying equipment and software purchased or financed during the tax year.
Example Section 179 Impact:
- • Equipment Cost: $50,000
- • Section 179 Deduction: $50,000
- • Cash Savings (at 21% Tax): $10,500
- • Lowered Effective Cost: $39,500
Lease vs. Buy Decision
When deciding whether to lease or buy, ask yourself: "Will this asset generate more revenue per month than its lease payment?" If yes, leasing allows you to start generating profit immediately without depleting your working capital.
Hidden Costs to Watch For
- Documentation Fees: One-time fees charged at the start of the lease.
- Maintenance Requirements: Operating leases often require you to follow a strict maintenance schedule to preserve FMV.
- Insurance: Most leasing companies require you to carry comprehensive insurance on the asset.