Income Tax
The main tax advantage of leasing is that the payments on a true lease can be deducted over the lease term. A true lease has a fair market value option to purchase the equipment at the end of the initial lease term. If the lease has a dollar buy-out or other bargain purchase option, the equipment is required to be depreciated over a useful life based on IRS tables that is normally longer than the lease term.

Financial Statement Treatment of Leases
If a leasing arrangement is considered to be a method of financing for the purchase of equipment, the equipment must be shown as an asset on the financial statement and the lease as a liability for the present value of the lease payments. Purchase treatment requires depreciation write-off of the equipment and interest/principal amortization of the debt. However, if the lease does not meet the complicated criteria of a purchase, the payments are expensed and the lease is considered "off balance sheet" financing. Therefore, it does not affect the debt to equity ratio for financial or bank requirements.

Cash Flow of Leasing
Initial cash flow requirements for leasing are usually less than purchasing. Banks usually require a large down payment. Purchasing also requires up front payment of sales tax on the total purchase price. Leasing, however, allows for a lower down payment and payment of sales tax on each monthly payment making it easier to acquire the asset while conserving working capital. Although the total lease payments, sales tax, and purchase option price may exceed the cost of an outright purchase, the opportunity cost of capital plus the possible alternative minimum tax on the purchase may make the lease option more favorable.