Insight
Operating lease vs. finance lease vs. secured purchase: equipment acquisition in Washington
Three ways to put equipment to work without paying cash. The one you choose decides who owns it, who carries the risk, and what a court calls it when the deal goes wrong.
Published
June 12, 2026
Updated
June 12, 2026
A contractor needs a $180,000 excavator. The dealer offers three ways to take it home: lease it and hand it back in four years, lease it and own it at the end for a dollar, or finance the purchase and own it from day one. All three put the machine on the job site Monday morning. They are not the same deal, and the differences only surface later, when the contractor wants out, when the equipment is obsolete, or when the business files for bankruptcy.
The labels do not settle which deal it is. A document with “lease” across the top can be a disguised purchase in the eyes of the law, and that recharacterization changes who owns the equipment, what a creditor can seize, and how the IRS treats every payment. Telling a true lease from a secured purchase is most of what this decision is about.
Operating lease vs. finance lease
Both are leases under Article 2A of Washington’s Uniform Commercial Code (RCW 62A.2A), but they allocate the risk in opposite directions. In an operating lease, a true lease, the lessor keeps ownership and the residual risk. You use the equipment, make payments, and return it at the end of the term. If it is worth less than expected when you hand it back, that is the lessor’s problem, and if you stop needing it, you return it and walk away.
A finance lease shifts that risk to you. Article 2A defines it as a deal where the lessor is essentially a financier: it buys the equipment you selected from the supplier you chose, and you look to the supplier, not the lessor, for warranty claims (RCW 62A.2A-103). The obligation is “hell or high water,” meaning you keep paying even if the machine breaks. A finance lease usually runs for most of the equipment’s useful life and often ends with a purchase option. It looks and behaves like buying on time, because economically that is what it is.
That economic reality is exactly where a finance lease can stop being a lease at all.
When a “lease” is really a secured purchase
Washington draws the line with a specific test. Under RCW 62A.1-203, a transaction is a security interest rather than a true lease when the lessee cannot terminate the obligation and one of a few conditions holds: the term runs for the entire economic life of the goods, the lessee is bound to renew for that life or to become the owner, or the lessee can buy the equipment for nominal consideration, the classic dollar buyout. Meet the test and Article 9 governs the deal (RCW 62A.9A), no matter what the title page says.
The distinction is not academic. A true lease and an Article 9 security interest produce different outcomes on the two days that matter: default and bankruptcy. If the deal is a true lease, the lessor still owns the equipment and takes it back as its own property. If the deal is really a secured loan, the “lessor” is just a creditor with a lien, and it has to follow Article 9’s foreclosure rules, stand in line with other creditors, and account for any surplus. Writing a dollar-buyout option into a document labeled “lease” is the most common way a business lands in the second category by accident.
Here is how the three structures line up across the dimensions that decide the choice.
The tax and accounting picture
The legal characterization drives a tax one. With a true lease, you deduct the rent as an operating expense and the lessor takes the depreciation. When you finance a purchase, you own the equipment, so the depreciation is yours, and for most business equipment that means Section 179 expensing or bonus depreciation under IRC section 179, which can let you write off the full cost in the year you place the equipment in service. The IRS applies its own true-lease test, close to the UCC’s but not identical, so a deal can be a lease for one purpose and a sale for another. That mismatch is worth catching before you sign, not at audit.
Accounting retired the old shorthand. Under ASC 842, the lease standard in effect since 2019, almost every lease longer than a year now appears on the balance sheet, so the old “operating leases stay off the books” advantage is mostly gone. What still differs is the expense pattern. An operating lease produces a level expense across the term, while a finance lease and a financed purchase front-load the interest. If how the deal reads on your financials matters to a lender, a bonding company, or an investor, that pattern is the thing to model.
What this looks like in Washington
For the Bellevue and Seattle businesses we work with, the practical question is usually perfection, not philosophy. When a deal is a secured purchase or a recharacterized lease, the lender protects its priority by filing a UCC-1 financing statement under Article 9 (RCW 62A.9A) with the Washington Department of Licensing. That filing fixes who gets paid first if the business fails, and a financier who assumed it held a true lease, and so never filed, can find itself an unsecured creditor in a bankruptcy. On the buyer’s side, the same diligence runs in reverse: we read what is being pledged, whether the lender is taking a blanket lien on everything the company owns, and whether a personal guaranty is buried in the schedules.
Washington has no equipment-financing quirk that overrides the UCC here, but it enforces the Article 9 rules strictly, and the lease-versus-security-interest question is litigated often enough that the drafting deserves attention up front.
How to choose
The structure should follow how long you will use the equipment and whether you want to own it.
- Equipment that ages fast or that you need only for a project, such as IT hardware or a machine for one job, usually argues for a true operating lease. You offload the obsolescence risk and return the equipment when you are done.
- Equipment you intend to use for most of its life and then keep points to a true finance lease or a secured purchase. The choice between them turns on cash flow, tax appetite, and whether you want the asset on your books from the start.
- Equipment that is core to the business and that you want to own and depreciate from day one calls for a secured purchase, financed with a UCC-1 the lender will file regardless.
Whichever you pick, the document has to match the intent. A true lease drafted with a dollar buyout is not a true lease, and a purchase dressed up as a lease for accounting reasons will be read for what it is when that matters. Get the characterization right at signing, while it is still cheap to fix.
Frequently asked questions
What is the difference between an operating lease and a finance lease?
An operating lease is a true lease: the lessor keeps ownership and the residual risk, and you return the equipment at the end. A finance lease shifts the risk to you. You carry warranty claims against the supplier, pay on a hell-or-high-water basis, and usually hold an option to buy. Economically, a finance lease behaves like a financed purchase.
When is a lease treated as a secured purchase?
Under RCW 62A.1-203, when you cannot terminate the lease and either the term covers the equipment’s full economic life or you can buy it for a nominal amount, such as a dollar. Meeting that test makes the deal a security interest under Article 9, regardless of the document’s title.
Does it matter whether my equipment deal is a lease or a loan?
Yes, and the difference shows up where it is most expensive. The characterization decides who owns the equipment on a default and how the claim is treated in bankruptcy, and it changes who takes the depreciation for tax. The same monthly payment can lead to very different outcomes depending on how the deal is structured.
Should I lease or buy business equipment?
Lease equipment that ages quickly or that you need only temporarily, so you offload the obsolescence risk. Buy, or finance the purchase of, equipment that is core to the business and that you want to own and depreciate, particularly where Section 179 expensing applies. Useful life and ownership intent drive the answer more than the monthly payment.
Does a finance lease go on the balance sheet?
Yes. Under ASC 842, both finance and operating leases longer than a year appear on the balance sheet. The difference is in the income statement: a finance lease front-loads interest and amortization, while an operating lease is expensed evenly across the term.
The label on an equipment document rarely decides what it legally is. Our commercial transactions attorneys in Bellevue and Seattle structure equipment leases and secured financing so the deal you intend is the deal you get. Talk to us before you sign, while the characterization is still in play.
