Buying or Leasing Equipment: Which Number Actually Decides It

Three effects, ranked, and the surprise is the ranking

Buy-or-lease arguments almost always land on tax. Leasing, the argument runs, lets you deduct the whole rental as an operating expense while buying forces you to spread the cost across a depreciation schedule, so leasing deducts faster and therefore wins. The argument has the right shape and the wrong magnitude. Priced on a 60,000-euro machine held for five years, at a 25 % tax rate and a 4 % discount rate, the difference between the slowest and the fastest write-off available is 1,068 euros — under two per cent of the price, and less than the spread between two lease quotes from the same broker.

The two effects that actually decide the question are both about price rather than tax. Whether the rental credits you with the machine's residual value is worth about 11,200 euros in the same model — eighteen and a half per cent of the price — and the gap between a bank rate of 5.5 % and an implicit lease rate of 11 % is worth about 7,900, thirteen per cent. Those are the numbers to argue over. If you compare a purchase and a lease on their tax treatment and accept whatever residual assumption and whatever implicit rate the quote happens to contain, you have argued about a two-per-cent term and conceded a thirty-per-cent one.

First place: a lease sells you the depreciation, not the machine

A rental is priced on the value the asset loses while you have it, plus a return on the money tied up. That is the whole product. If the machine is worth 60,000 euros new and 20,000 after five years, the lessor is financing 40,000 of loss and expects the 20,000 back at the end. Priced that way at a 7 % implicit rate, the rental is about 909 euros a month over sixty months, or 54,523 in total. Priced as though the machine were worthless at the end — which is exactly what a quote does when the residual is quietly assumed away — the same sixty months cost about 1,188 a month, or 71,284. That is 16,761 euros of difference on one assumption nobody put in writing.

This is why the first question to a lessor is not the monthly figure but what residual value the quote assumes and who keeps it. A finance lease with a token purchase option at the end hands you the residual, and is priced accordingly. An operating lease with a return obligation keeps it with the lessor, who will sell the machine and pocket the proceeds. Both are legitimate products; quoting one against the other on the monthly payment alone is not a comparison, it is a category error. And the direction is unambiguous: the better the asset holds its value, the more buying wins, because the residual is the part of the purchase price you get back.

Second place: the interest rate you were not shown

A lease quote gives you a monthly payment and a term. It does not usually give you a rate, and it does not have to, because a rental is a price for a service rather than a credit agreement. You can always recover the rate yourself: it is the discount rate at which the present value of the payments equals the price of the asset less the present value of any residual. Do that on the numbers above and a quote of 1,188 euros a month for sixty months on a 60,000-euro machine with no residual credit works out at about 7 % — while 1,053 a month with the residual credited works out at 11 %. The headline monthly figure and the underlying rate move in opposite directions here, which is precisely why comparing monthly payments is not comparing anything.

The purchase side is easier to see through, and that is part of the problem: a 60,000-euro loan over sixty months at 5.5 % is 1,146.07 euros a month and 8,764 euros of interest, and the bank has to tell you so. When a rental sits beside a loan on a page, the loan carries a visible rate and the rental does not, and the invisible one is very often the dearer. Recovering it takes one calculation and turns an unfalsifiable sales pitch into a number you can shop around.

Third place: what the write-off is really worth, in money

Which schedule applies to a purchase — straight line, declining balance, units of production — is a separate question with its own article on this site, and the mechanics are not repeated here. What matters for a buy-or-lease decision is only the money the choice moves, and the honest answer is that it moves less than the argument suggests. Germany is the useful test case, because its 2026 rules are unusually generous. Paragraph 7(2) of the income tax act reinstated declining-balance depreciation for movable assets acquired after 30 June 2025 and before 1 January 2028, at up to three times the straight-line rate and capped at 30 %. On a five-year machine that is a first-year deduction of 18,000 euros instead of 12,000 — and at a combined 30 % rate with a 4 % discount rate it is worth 204 euros of present value against straight line. Three tenths of one per cent of the price.

Push harder and it still stays small. Paragraph 7g lets a business with profits up to 200,000 euros deduct half the expected cost of an asset up to three years before buying it, and then take a special depreciation of 40 % on top of the ordinary schedule. Run through properly — the investment deduction reduces the depreciable base by the same amount it deducted, so the total written off is still the cost and not more — that front-loads 30,000 euros into the year before purchase and 18,000 into the first year, worth about 1,430 euros of present value against straight line, or 2.4 % of the price. It is real money and worth claiming. It is not a reason to buy something you would otherwise lease.

There is one configuration where the argument becomes true, and it is worth naming because it is not rare. The value of accelerating a write-off is the tax rate multiplied by the time value of moving the deduction forward, so it grows with both. At a 25 % rate and a 2 % cost of capital, moving a 60,000-euro write-off from five-year straight line to an immediate deduction is worth 0.9 % of the price. At a 60 % marginal rate — a sole trader at the top of a progressive scale, paying social contributions on the same profit — and a 12 % cost of capital, the same move is worth 10.3 %. A highly taxed, cash-constrained buyer really should let depreciation decide. A company at corporation-tax rates with access to bank credit really should not.

The trap that removes the tax argument entirely

The whole faster-deduction story rests on the rental being an expense of yours rather than an asset of yours. That is not automatic. Where the terms make you the economic owner — a term covering most of the asset's life, a bargain purchase option, a residual you have effectively guaranteed — the asset is attributed to you, you put it on your balance sheet and you depreciate it exactly as if you had bought it. The deduction then runs at the depreciation schedule's pace, not the rental's, and the entire argument for leasing on tax grounds evaporates while every rand of the implicit rate stays.

The same movement happened once for reporting. Under IFRS 16, in force for annual periods beginning on or after 1 January 2019, a lessee recognises a right-of-use asset and a lease liability for almost every lease, with narrow exemptions for short terms and low-value items. Companies reporting under that standard lost the off-balance-sheet argument years ago; those on national accounting rules mostly did not, which is why the same lease can look like a clean operating expense in one set of accounts and a financed purchase in another. Ask which of the two you are in before you count the deduction.

What would change the verdict

Four situations reverse it cleanly. When the asset obsolesces faster than it depreciates — a fleet of laptops, a diagnostic device whose software support ends on a published date — the residual you would be buying is a fiction and the whole first-place effect disappears. When the alternative is not getting the equipment at all, because a bank will not lend against it and a lessor will, the implicit rate is the price of existing and any comparison to a loan you cannot obtain is academic. When the rental genuinely bundles services you would otherwise buy — maintenance, replacement within a day, insurance — you are comparing a price to a different price. And when the balance sheet itself is the constraint, because a covenant caps your gearing, a lease that stays off it under your accounting rules buys you headroom that has a real price.

Two figures do not change the verdict and are worth dismissing so they stop coming up. Recovering the value-added tax on a purchase in one filing period rather than across sixty rentals ties up 12,000 euros for a few weeks, which at a 4 % cost of capital is worth about 79 euros: a rounding error. And the total of the payments is not a comparison at all — 68,764 euros of loan payments against 54,523 of rentals says nothing, because one of those buys a machine worth 20,000 at the end and the other buys nothing. Compare positions at a common date, not sums of instalments.

Frequently asked questions

So is leasing simply worse than buying?

No. It is worse on the specific model in this article, which describes an asset that keeps a third of its value after five years and a buyer who can borrow at 5.5 %. Change either condition and the answer changes. An asset with no meaningful residual removes the largest effect in the table, and a buyer who cannot borrow at all removes the second. Leasing is a financing product, and financing products are judged against the alternative you actually have, not the one in a worked example.

How do I work out the interest rate hidden in a lease quote?

You need three numbers: the cash price of the asset excluding tax, the monthly payment, and the term. The implicit rate is the one at which the present value of the payments equals the cash price, less the present value of any residual you get to keep at the end. Any loan calculator solves it if you enter the cash price as the amount borrowed, the rental as the payment and the term as the number of instalments, then read off the rate. On the example here, 1,188 euros a month for sixty months against a cash price of 60,000 comes out at about 7 %, and 1,053 a month with a 20,000 residual credited comes out at about 11 % — the higher payment is the cheaper deal.

Does the answer differ between a company and a sole trader?

Yes, and in a direction the table makes visible. The value of an accelerated write-off is the tax rate multiplied by the time value of pulling the deduction forward, so a sole trader taxed at the top of a progressive scale and paying social contributions on the same profit sees a far larger benefit than a company at a flat corporation-tax rate. In France that flat rate is 15 % on the first 42,500 euros of profit and 25 % above it under article 219 of the tax code as in force in 2026. In Germany it is 15 % corporation tax plus the solidarity surcharge, with the local trade tax on top at a rate each municipality sets — 3.5 % multiplied by a local multiplier that has a statutory floor of 200 % for 2026, rising to 280 % from 2027. Higher rate, bigger benefit; that is the whole rule.

What about small items — is there a threshold below which I just expense it?

In Germany yes, and it is worth knowing precisely. Paragraph 6(2) of the income tax act allows an immediate write-off for movable assets whose cost net of recoverable value-added tax does not exceed 800 euros. Between 250 and 1,000 euros the alternative under paragraph 6(2a) is a collective pool written off over five business years. Below the first threshold the buy-or-lease question largely dissolves, because an immediate deduction is the fastest schedule that exists and no rental can beat it. Other countries set their own limits by their own instruments, so check the figure that applies to you rather than borrowing this one.

Can I compare a purchase and a lease by adding up the payments?

No, and it is the most common way this decision is got wrong. Sixty loan instalments of 1,146.07 euros total 68,764, and sixty rentals of 908.71 total 54,523, which appears to settle the matter in favour of leasing by more than 14,000 euros. It settles nothing: at the end of the loan you own a machine worth 20,000 and at the end of the lease you own nothing, and the two streams of payments sit at different points in time. Put both on the same footing — discount the payments to today, add back the residual, apply the tax relief where it actually falls — and the ordering can and here does reverse.