# True Lease vs Finance Lease

Canonical URL: https://fundmyequipment.com/learn/compare/true-lease-vs-finance-lease/
Last modified: 2026-05-29T19:39:17+00:00
Type: efin_comparison

## Summary

True Lease vs Finance Lease. Side-by-side comparison with cost analysis, tax implications, and when each wins.

## Content

True leases and finance leases are both ways to acquire equipment over time, but they differ on ownership, tax treatment, accounting, and end-of-term options. The choice depends on whether you want to own the equipment, how you want to handle taxes, and which structure fits your cash flow.

The core difference
True lease (operating lease for tax): the lessor owns the equipment. You use it for the term and either return it or buy it out at fair market value (FMV) at term-end. You deduct lease payments as operating expense.
Finance lease (capital lease for tax): economically equivalent to a purchase. You "lease" but own the equipment at term-end (typically for $1). You depreciate the equipment for tax purposes and can claim Section 179.

Side-by-side comparison

FactorTrue leaseFinance lease

Ownership at term-endOptional buyout at FMV (15-25% residual)You own (typically for $1)
Monthly paymentLower (smaller financed amount)Higher (full amount amortized)
Tax treatmentOperating expense deductionDepreciation + interest expense
Section 179 eligibleNo (lessor claims depreciation)Yes
Accounting (ASC 842)Right-of-use asset + lease liabilityRight-of-use asset + lease liability (front-loaded expense)
End-of-term flexibilityBuy, return, or upgradeYou own outright



When true lease wins

You want the lowest monthly payment
You plan to upgrade equipment every 2-3 years
The equipment depreciates fast (computers, mobile devices, electronics)
You have already maxed out Section 179 capacity
You want simpler tax treatment (single operating-expense deduction)


When finance lease wins

You want to own the equipment long-term
You have Section 179 capacity to use (typically a profitable business)
The equipment holds value for 5+ years (trucks, machinery, manufacturing)
You want depreciation deductions over the recovery period
You prefer to know your buyout price up front ($1)


The tax math example
$100,000 equipment, 60-month term, 25% tax rate.
Finance lease ($1 buyout): deduct ~$100,000 via §179 in year 1 (or §179 + bonus depreciation), saving $25,000 in taxes year 1. Plus interest deduction over 5 years.
True lease (FMV, 20% residual): deduct ~$80,000 of lease payments over 5 years ($16,000/year), saving $4,000/year in taxes. Total: $20,000 of tax savings over 5 years.
For a profitable business with §179 capacity, finance lease saves more in year 1 (when cash flow may need it most). For a business near breakeven, true lease spreads the smaller deduction more usefully.

See our true lease and finance lease glossary definitions, or use the lease vs buy calculator to model your specific numbers.

Not tax advice. Consult your CPA.