$1 buyout lease vs. FMV lease vs. equipment finance agreement: which one are you signing?

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The word “lease” covers very different deals. Leasing is also the most common way businesses pay for equipment: in the Equipment Leasing & Finance Foundation’s 2024 Horizon Report, leasing accounted for 26% of equipment acquisitions by payment method, more than secured loans (16%) or lines of credit (14%). So it pays to know which kind of lease, or loan, you are signing.

How are an EFA, a $1 buyout lease, and an FMV lease different?

There is a fourth structure in between: the 10% purchase option, often written as a 10% PUT, where you buy the equipment at the end for 10% of its original cost. The payment is lower than an EFA’s, and because the purchase is usually mandatory, it is generally treated as a purchase for tax.

The real decision is between owning (an EFA or a $1 buyout) and true leasing (an FMV lease). A $1 buyout lease is a lease in name only. If someone quotes you one, compare it to an EFA, not to an FMV lease.

How can you tell which one you are signing?

The paperwork tells you, if you know where to look:

• The title of the document. An “Equipment Finance Agreement” is a loan. A “Lease Agreement” or a master lease with a schedule is a lease, and the schedule tells you which kind.
• The purchase option. “$1.00” means a $1 buyout. “Fair market value” means an FMV lease. “10%” with the word PUT or “shall purchase” means a required 10% buyout.
• Who is named as owner. An EFA names you as owner and gives the lender a security interest. A lease says the lessor owns the equipment.
• The end-of-term section. FMV leases spell out notice deadlines, return conditions, and how fair market value is set. An EFA has no end-of-term section to speak of.
• Sales tax. Depending on your state, sales tax on a lease may be charged on each payment instead of up front, which is another clue to what you are signing.

If the quote does not say which structure it is, ask. A clear funder will tell you in one sentence.

Which one costs less?

The FMV lease has the lowest payment. Whether it costs less overall depends on what you do at the end. Here is $100,000 of equipment over 60 months at an assumed 9%:

Payments in arrears on $100,000 with no money down, at an assumed 9% for every structure. Real FMV buyouts are set by the equipment’s market value at the end of the term, which can be higher or lower than the residual assumed here. Illustrative, not an offer.

The FMV lease saves about $199 a month against the EFA and costs about $3,070 more if you end up buying the equipment. If you return it, you paid about $112,620 for five years of use and walk away. That gap is the price of flexibility, and the full lease-versus-loan math is in equipment lease vs. loan.

Which ones qualify for Section 179?

The deduction belongs to the owner. With an EFA or a $1 buyout lease, you are generally treated as the owner, so the full price can qualify for Section 179 in the year the equipment is placed in service, up to $2,560,000 for 2026 (IRS Rev. Proc. 2025-32). A 10% purchase option is usually treated the same way.

With a true FMV lease, the lessor owns the equipment and takes the depreciation; a business generally cannot depreciate property it leases (IRS Publication 946). Instead, you generally deduct the lease payments as you make them. Your CPA confirms which treatment applies to your contract. For the year-end timing, see the Section 179 year-end playbook.

One myth to retire: leases are not automatically “off the books.” Under the current accounting standard, businesses that report under GAAP record leases with terms longer than 12 months on the balance sheet (FASB, ASU 2016-02). If a lender or bonding company reads your financials, an FMV lease will show up there too.

What happens at the end of an FMV lease?

You have three choices: buy the equipment at its fair market value, return it, or renew. Three details decide how smoothly that goes:

• Notice deadlines. Many FMV leases require written notice before the term ends if you plan to buy or return the equipment, and the window can be months long. Miss it and the lease may renew automatically, often month to month at the same payment.
• How fair market value is defined. The lease sets the method. Know whether it means the value of the equipment in place and working, or what it would bring if removed and sold, because the two can be far apart.
• Return conditions. Condition standards, de-installation, and who pays for shipping are all written into the lease. Read them before you sign, not in month 59.

Five West’s lease programs also offer upgrade and add-on paths mid-term on qualifying leases, which is one of the main reasons to choose an FMV lease for technology that changes fast.

What should you read before you sign any of the three?

• Non-cancelable payments. Most equipment finance contracts cannot be canceled, and payments are due even if the equipment disappoints. Disputes about the equipment go to the seller, not the funder.
• Early payoff. Ask how an early payoff is calculated. Many programs have no prepayment penalty; on an FMV lease, ending early can mean paying the remaining payments plus the residual.
• Insurance. You will usually need to insure the equipment and name the funder as loss payee.
• Guarantees. Small-business deals often require a personal guarantee. If you want to avoid one, see how to qualify for corporate-only financing.

Which one should you choose?

• You will run it for years and it holds its value: an EFA, or a $1 buyout if your funder writes it that way.
• You want the full deduction this year: an EFA or a $1 buyout.
• It will be outdated in a few years, or the payment is the constraint: an FMV lease.
• You want a lower payment and you know you will buy it: the 10% purchase option, if you will have the cash for the buyout.

The bottom line

Before you sign, find three things in the paperwork: who owns the equipment, what the purchase option says, and what the end of the term requires. An EFA and a $1 buyout are ownership with different paperwork. An FMV lease is true leasing: the lowest payment and the option to walk away, with a market-value buyout if you stay. Pick the one that matches how long you will keep the equipment, and price them side by side before you decide.

Frequently asked questions

Is an equipment finance agreement a loan?

Yes, in practice. You own the equipment from day one, the lender files a lien, and fixed payments pay the price to zero. There is no buyout at the end because the equipment was always yours.

Is a $1 buyout lease the same as a loan?

Economically, yes. The payment is close to an EFA payment, ownership transfers for one dollar at the end, and it is generally treated as a purchase for tax. It is sometimes called a capital lease or, under current accounting rules, a finance lease.

Can I take Section 179 on leased equipment?

On a $1 buyout lease, generally yes, because it is treated as a purchase. On a true FMV lease, generally no: the lessor owns the equipment, and you deduct the lease payments instead. Confirm with your CPA.

Which structure has the lowest monthly payment?

The FMV lease, because a residual value is left at the end of the term. On $100,000 over 60 months at an assumed 9%, an FMV lease with a 15% residual runs about $1,877 a month, compared with about $2,076 for an EFA.

What happens if I miss the end-of-lease notice on an FMV lease?

Many FMV leases renew automatically if you do not give notice in time, often month to month at the same payment. Check the notice window in your lease when you sign and put the date on your calendar.

Are equipment leases still off the balance sheet?

Not for businesses that report under GAAP. The current lease accounting standard requires leases with terms longer than 12 months to be recorded on the balance sheet, whether they are finance or operating leases.

What is a 10% PUT lease?

A lease that ends with a required purchase at 10% of the equipment’s original cost. The payment is lower than a $1 buyout because part of the price is deferred to the end, and it is generally treated as a purchase for tax.

Keep reading

More on structure, taxes, and the financing process.

Financing structureEquipment lease vs. loan: which is better for a small business?The payment, tax, and ownership math side by side. Tax strategyWhat is Section 179?The 2026 limits, what qualifies, and how it works when you finance. Financing basicsHow does equipment financing work, and how long does it take?Every step from the quote to funding.

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This article is general information about commercial equipment financing structures. It is not tax, legal, or accounting advice, or a commitment to finance. Tax and accounting treatment depends on your contract and your business; confirm with your CPA. All financing is subject to credit approval and underwriting.