A dollar buyout lease is equipment financing dressed up as a lease: you make fixed monthly payments over a set term, then pay exactly one dollar at the end to take legal title to the equipment. The IRS treats the arrangement as a conditional sale rather than a true lease, so you’re considered the owner from day one for tax purposes. That status is what makes the structure attractive. It unlocks Section 179 expensing, bonus depreciation, and a deduction for the interest baked into your payments, the same benefits you’d get buying the equipment outright with a conventional loan.
How the Structure Works
A financing company buys the equipment you’ve selected and enters into an agreement requiring fixed payments over a set period, typically three to seven years. Those payments cover the full equipment cost plus financing charges. When the last scheduled payment clears, you pay one dollar and receive legal title.
Monthly costs run higher than they would under a fair market value lease for the same equipment, because you’re paying off the full price rather than just paying for use. The tradeoff is certainty. You know exactly what the equipment will cost you, and there’s no residual value gamble at the end. For equipment with a long useful life that you plan to keep running well past the payment schedule, that predictability is the whole point.
The financing company doesn’t truly own the equipment during the term. They hold a security interest, much like a bank holding a lien on a financed car, and they protect that interest by filing a UCC-1 financing statement with the state. That filing is what gets cancelled at the end when title transfers to you.
Why the IRS Treats You as the Owner
The decisive factor is the nominal purchase option. When you can acquire the property at the end for a price far below its expected fair market value, the IRS considers the transaction a sale from inception.1Internal Revenue Service. Income and Expenses 7 One dollar clears that bar easily. That classification gives you access to the full suite of ownership-based tax benefits.
Section 179 Expensing
Section 179 lets you deduct the full purchase price of qualifying equipment in the year you place it in service instead of spreading the deduction over many years.2Office of the Law Revision Counsel. 26 USC 179 – Election To Expense Certain Depreciable Business Assets The statutory base limit is $2,500,000, adjusted annually for inflation. For tax year 2026, the inflation-adjusted maximum is $2,560,000, and the deduction begins phasing out dollar-for-dollar when total qualifying equipment placed in service during the year exceeds $4,090,000. Businesses that stay under the phase-out threshold can potentially write off the entire cost of financed equipment in year one.
Bonus Depreciation
Following passage of the One Big Beautiful Bill Act, 100% bonus depreciation is again available for qualifying property placed in service in 2026.3Office of the Law Revision Counsel. 26 USC 168 – Accelerated Cost Recovery System It applies to both new and used equipment, as long as the asset is new to you. Bonus depreciation operates independently of Section 179 and has no dollar cap, which makes it particularly valuable for large capital purchases that exceed the Section 179 limit. For equipment placed in service in 2023 or 2024, when the rate had dropped to 60% and 40% respectively, the restored full rate is a meaningful change for planning purposes.
MACRS Depreciation
If you don’t expense the full cost through Section 179 or bonus depreciation, the Modified Accelerated Cost Recovery System lets you depreciate the remaining basis over the asset’s assigned recovery period.4Internal Revenue Service. Publication 946 – How To Depreciate Property Recovery periods vary by asset type: five years for computers and vehicles, seven years for office furniture and most machinery, longer for certain specialized equipment. MACRS front-loads deductions in the early years, which helps offset financing costs when cash flow is tightest.
Interest Deduction
Because the IRS views your payments as installments on a purchase, the financing charges embedded in those payments qualify as deductible business interest under 26 U.S.C. ยง 163.5Office of the Law Revision Counsel. 26 USC 163 – Interest One limit to watch: businesses with average annual gross receipts above $30 million face a cap on interest deductions equal to 30% of adjusted taxable income plus business interest income. Smaller businesses generally fall below this threshold and can deduct the full interest amount without restriction.
When It Beats a Fair Market Value Lease
The alternative most often compared to a dollar buyout is a fair market value lease, where you use the equipment for a fixed term and then choose whether to return it, renew, or buy it at whatever the market price happens to be. The two structures serve different purposes, and choosing wrong can cost real money in either overpayment or lost tax benefits.
- Dollar buyout payments run higher because they cover the equipment’s full cost. FMV payments are lower since you’re only paying for the use of the asset.
- With a dollar buyout, you’re the tax owner and can claim depreciation, Section 179, and bonus depreciation. Under an FMV lease, the lessor claims depreciation and you deduct lease payments as an operating expense.
- A dollar buyout locks you into ownership. An FMV lease lets you walk away if the technology has moved on or your needs have changed.
- Dollar buyouts fit equipment with a long useful life you plan to keep, such as CNC machines or commercial vehicles. FMV leases fit technology that evolves quickly, like servers or medical imaging gear you’ll want to replace in a few years.
What You’re Committing To
Sales Tax Up Front
Because a dollar buyout lease is treated as a sale from inception, many states impose sales tax on the full equipment price at the time the lease begins, not on the one-dollar buyout at the end. This can create a significant upfront cost that catches business owners off guard. A $200,000 piece of equipment in a state with a 6% sales tax rate means $12,000 due at signing, on top of your first payment and any documentation fees.
Rules vary considerably by state. Some tax each monthly payment instead, and a handful exempt certain categories of manufacturing or agricultural equipment entirely. Check with your state’s department of revenue before signing. The financing company will collect and remit whatever your state requires, and by that point it’s too late to restructure.
Insurance for the Full Term
Because the lender holds a security interest in the equipment, they’ll require you to maintain insurance covering the asset’s full replacement cost for the entire lease term. The policy must name the lender as loss payee, meaning insurance proceeds go to them first if the equipment is destroyed or stolen. You’ll also need commercial general liability coverage listing the lender as an additional insured. Most agreements require proof of coverage on an ACORD 25 certificate and 30 days’ written notice before any policy cancellation. Letting coverage lapse is typically treated as a default under the lease, so set reminders for renewal dates.
No Easy Exit
Most dollar buyout leases are non-cancellable. This is where the loan-like nature becomes most apparent: you can’t simply return the equipment and walk away the way you might with a short-term rental. If you miss payments, the lender can accelerate the entire remaining balance, making it due immediately, and repossess the equipment. The acceleration clause is standard in these agreements, and courts routinely enforce it.
To exit early without defaulting, you’ll typically need to pay the remaining balance in full, sometimes with a prepayment penalty. A few lenders allow early buyout at a discounted payoff after a certain number of payments have been made, but this isn’t universal. Read the early termination provisions carefully before signing.
Taking Title at the End
The final step is anticlimactic compared to the years of payments that preceded it. Once your last scheduled payment and the one-dollar residual are processed, the lender generates a formal bill of sale transferring title. You’ll typically receive notice about 30 days before the contract expires with final payment instructions, and the dollar payment usually runs through the same method you’ve been using throughout the lease. Expect the finalized bill of sale or ownership certificate within two to four weeks after the transaction closes, and keep those documents with your business records permanently.
The more important administrative step happens on the lender’s side. They need to file a UCC-3 termination statement to cancel the UCC-1 financing statement they filed at the beginning.6Legal Information Institute. Uniform Commercial Code 9-513 – Termination Statement For business equipment, the lender must file the termination within 20 days after receiving an authenticated demand from you. Don’t assume it will happen automatically. Send a written request and follow up. Until that UCC-1 is terminated, the lender’s security interest remains on public record, which can create problems if you try to use the equipment as collateral for another loan or sell it to a third party.