Lease, Borrow or Pay Cash: Capital Expense Considerations Post Tax Reform

If you’re looking to update equipment or improve your facilities in the coming year, it’s important to recognize that the tax reform signed into law in late 2017 included several key provisions aimed at encouraging company reinvestment.

The following primer can help you evaluate your funding options and make the most of any tax advantages—while ensuring you don’t leave any of those precious capital improvement dollars on the table.

What changed

Much of the news about the tax reform focused on the lower corporate tax rate. However, the law also included provisions for how companies account for their capital expenses. For example, the reform increased the Section 179 maximum deduction for business property the first year it’s placed into service to $1 million from $500,000. Businesses can also benefit from a bonus depreciation deduction that applies to new and used property. In addition, the first-year deduction increased to 100% of the asset's cost from 50%. This accelerated deduction begins to phase out in 2023—so businesses may want to consider making purchases sooner rather than later given the impact of the increased deduction maximum and bonus depreciation.

The law also decreased the amount of interest expense that businesses with gross receipts of more than $25 million can deduct to 30% of EBITDA through 2022—potentially causing an organization to rethink the amount of debt it is willing to take on to fund a purchase. 

Three paths to investment

What hasn't changed is that once you head down the path toward capital investment, you can choose cash, lease or debt to make the purchase. However, the pros and cons of each have shifted  under the new tax rules.

Taking on a lease

The upside of leasing? Most leases don’t require a down payment. So there’s a lower barrier to entry in terms of accessing the equipment you need. Further, the terms are often flexible and leasing companies can get quite competitive—which often works in a lessee's favor. There are also some tax benefits that apply to lease payments.

Ultimately, however, the biggest advantage is saving your cash to put toward company growth. Leases can make particular sense when it comes to equipment that will become technologically obsolete relatively quickly. That way at the end of your lease, you can move on to using the newer, more advanced equipment.

The downside of leasing is that you don’t own the equipment and you build no equity. Which means that over the long-term, leasing can also be more expensive than purchasing the asset outright. You can’t claim the aforementioned 179 deduction or bonus depreciation when leasing. And when your lease expires, your organization still needs to figure out what to do next to access the machinery or equipment that it needs.

Financing an asset purchase

If you’re looking at equipment that won’t become outdated quickly, then taking out a loan to make the purchase may be the right approach. The biggest advantage to financing equipment is that you own it. Your business will use the loan to purchase the asset and you can use it however you wish for as long as you need.

This is where the new tax changes come into play: Given the deduction and depreciation opportunities, it is potentially more appealing to buy assets. Depending on the type of equipment, your company may also be able to recoup some of its investment by reselling the equipment at the end of its use.

There are a few drawbacks to financing an asset purchase—including typically more upfront cost that can tie up cash your company may need to fuel its growth. Taking out a loan does cost more than buying something outright with cash because of the additional interest you'll pay. (That said, the interest may be deductible.) 

Whether financing is more expensive than leasing is something your finance team will need to review on a case by case basis. Lastly, if the equipment becomes obsolete, than recouping any of the investment via a resale may not be an option.

Paying cash for equipment

There are instances in which paying cash instead of leasing or financing new or used equipment may be the smartest move. If, for example, your organization already has a lot of debt, taking on more may not be an option. Some loan covenants actually require that companies maintain debt-to-asset or cash flow ratios at a certain level. The benefits of paying with cash mirror those of financing: You own the equipment and enjoy all the related tax benefits.

Given that you’re not beholden to paying interest, you’ll also likely end up saving money over the long-term.

That said, for many fast-growing companies, making an equipment purchase with cash would be a last resort—those dollars would preferably be used to fuel growth.

Great companies reinvest. If that means capital improvements for your organization then understanding the tax changes and financing options available is critical to getting the most from your dollars.

3 Paths to CapEx Purchases

There is more than one way to fund capital improvement projects. Consider the advantages and drawbacks of each to create a plan that makes sense for your current cash and tax situation.



  • Saves company cash
  • No down payment
  • Terms can be quite competitive


  • More expensive over the long-term
  • No equity or ownership
  • May not be eligible for tax deductions



  • You own the equipment
  • Spreads cost out over time
  • Eligible for tax deductions


  • You pay interest
  • You may need a down payment
  • Reselling may be a challenge

Paying cash


  • You own the equipment
  • Likely pay less overall
  • Eligible for tax benefits


  • Ties up cash that could be used for growth
  • Equipment may lose value

The views expressed by the author are not necessarily those of Fifth Third Bank and are solely the opinions of the author. This article is for informational purposes only. It does not constitute the rendering of legal, accounting, or other professional services by Fifth Third Bank, National Association or any of their subsidiaries or affiliates, and are provided without any warranty whatsoever. Deposit and credit products provided by Fifth Third Bank.