Lease vs Buy Equipment

§179 Deduction (IRC §179)

§179 = min(equipmentCost, §179 limit)

min($12,000, $1,220,000)

= $12,000

The §179 deduction lets businesses expense up to $1,220,000 of qualifying equipment in the year purchased rather than depreciating over time. The 2024 limit is $1,220,000.

IRC §179, Rev. Proc. 2023-34

Tax Savings from §179 (gross)

taxSavings = §179 × marginalTaxRate

$12,000 × 24.0%

= $2,880

First-year tax savings from expensing the equipment. This is the gross (undiscounted) amount — you actually receive this at tax filing ~12 months later.

PV of §179 Tax Savings (discounted 1 year)

PV(taxSavings) = taxSavings ÷ (1 + annualRate)

$2,880 ÷ (1 + 8.0%)

= $2,667

Since the §179 benefit is realized at tax filing (~1 year later), we discount it back to present value using the 8.0% annual discount rate.

PV of Salvage Value

PV(salvage) = salvage ÷ (1 + r)^5

$1,500 ÷ (1 + 8.0%)^5

= $1,021

Expected resale value of $1,500 at end of 5-year useful life, discounted to today's dollars. If you sell the equipment, this offsets your net cost.

NPV of Buying

NPV(buy) = cost − PV(§179 savings) − PV(salvage)

$12,000 − $2,667 − $1,021

= $8,312

Net present value cost of buying: upfront cash out minus the present value of tax savings and future salvage recovery.

Monthly Discount Rate

monthlyRate = (1 + annualRate)^(1/12) − 1

(1 + 8.0%)^(1/12) − 1

= 0.6434%

Convert the annual discount rate to a monthly rate using geometric compounding, not simple division. This gives the true equivalent monthly rate.

After-Tax Monthly Lease Payment

afterTaxPayment = monthlyPayment × (1 − taxRate)

$350.00 × (1 − 24.0%)

= $266.00

Lease payments are fully deductible as ordinary business expenses each month, so the real cost is reduced by your marginal tax rate.

NPV of Leasing (PVIFA method)

NPV(lease) = afterTaxPayment × PVIFA(r, n)

$266.00 × 32.0433

= $8,524

PVIFA = [1 − (1+r)^(−n)] / r = [1 − (1 + 0.6434%)^(−36)] / 0.6434% = 32.0433. This discounts all 36 monthly payments to present value.