The Tax Advantages of Equipment Financing Every Business Owner Should Know

Beyond the operational benefits of new equipment, significant tax advantages can reduce the effective cost of your purchase. Understanding these benefits helps you make better financing decisions and maximize your after-tax returns.

This guide covers the major tax benefits of equipment financing including Section 179, bonus depreciation, and interest deductibility. While we provide educational information, always consult with a qualified tax professional for advice specific to your situation. Tax limits and rules are adjusted annually, and the figures cited in this article are for the 2024 tax year unless otherwise noted.

Consult a Tax Professional

Tax laws are complex and change frequently. This article provides general educational information only and figures are subject to annual inflation adjustments by the IRS. Work with a CPA or tax advisor to understand how these provisions apply to your specific business and tax situation. The information presented here should not be relied upon as tax advice.

Section 179 Deduction

Section 179 of the IRS tax code allows businesses to deduct the full purchase price of qualifying equipment in the year it is placed in service, rather than depreciating it over several years.

The following 2024 limits are per IRS Revenue Procedure 2023-34, which sets the annual inflation adjustments. These limits are updated annually by the IRS.

Deduct up to $1,220,000 in qualifying equipment purchases (2024 limit per IRS)
Applies to both new AND used equipment (if new to your business)
Equipment must be placed in service during the tax year
Deduction cannot exceed your taxable business income
Phase-out begins when total equipment purchases exceed $3,050,000 (2024 threshold per IRS)

Section 179 Details	2024 Limits (per IRS Rev. Proc. 2023-34)
Maximum deduction	$1,220,000
Spending cap (phase-out threshold)	$3,050,000
Applies to	New and used equipment
When claimed	Year equipment placed in service
Business use required	More than 50%

Financed Equipment Qualifies

You can claim Section 179 on financed equipment. If you purchase a $100,000 machine with an equipment loan, you can potentially deduct the full $100,000 in year one, even though you are paying it off over 5-7 years.

Bonus Depreciation

Bonus depreciation allows businesses to immediately deduct a percentage of the cost of qualifying assets. Unlike Section 179, bonus depreciation has no cap on the deduction amount.

The phase-down schedule below was established by the Tax Cuts and Jobs Act of 2017 (Section 13201) and is codified in IRC Section 168(k). Unless Congress extends or modifies these provisions, bonus depreciation will phase out completely after 2026.

No dollar limit on the amount you can deduct
Applies to new and used equipment (if new to your business)
Can create or increase a net operating loss (unlike Section 179)
Percentage is declining each year under the Tax Cuts and Jobs Act schedule
Can be used in combination with Section 179

Tax Year	Bonus Depreciation Rate (per TCJA)
2022	100%
2023	80%
2024	60%
2025	40%
2026	20%
2027+	0% (unless extended by Congress)

Section 179 vs Bonus Depreciation

Both provisions allow accelerated deductions, but they have important differences. The limits shown are for 2024 based on IRS guidance and the Tax Cuts and Jobs Act schedule.

Factor	Section 179 (2024)	Bonus Depreciation (2024)
Dollar limit	$1,220,000	No limit
Income limitation	Cannot exceed business income	Can create NOL
New equipment	Yes	Yes
Used equipment	Yes	Yes
Phase-out threshold	$3,050,000 spending	None
Rate (2024)	100%	60%
Rate (2025)	100%	40%

Strategic Combination

You can use Section 179 first, then apply bonus depreciation to remaining basis. For a $500,000 equipment purchase in 2024, you might take $500,000 Section 179, or $300,000 Section 179 plus 60% bonus on the remaining $200,000 ($120,000), plus regular depreciation on the $80,000 balance.

Interest Deductibility

The interest you pay on equipment loans is generally deductible as a business expense, providing additional tax savings beyond depreciation.

Interest on equipment loans is typically fully deductible
Deduct interest in the year it is paid or accrued
Applies to both bank loans and vendor financing
Large businesses may face limitations under interest expense rules
Track interest separately from principal for tax purposes

Example: Interest Deduction Value

If you pay $8,000 in interest on an equipment loan and your effective tax rate is 30%, you save $2,400 in taxes from the interest deduction alone. Over a 5-year loan, this can add up to significant savings.

Tax Treatment of Equipment Leases

How you deduct lease payments depends on the type of lease and how it is structured for tax purposes.

Lease Type	Tax Treatment	Deduction Timing
Operating lease (true lease)	Lease payments fully deductible	As payments are made
Capital lease / Finance lease	Treated like ownership - depreciate asset	Depreciation + interest portion
$1 buyout lease	Usually treated as purchase	Section 179 / bonus depreciation available
FMV lease	Usually operating lease treatment	Deduct payments as operating expense

Lease vs Buy: Tax Comparison

The tax implications can vary significantly between leasing and buying.

Buying: Can claim Section 179 or bonus depreciation immediately
Buying: Deduct interest expense over loan term
Operating lease: Deduct full payment as operating expense
Operating lease: No depreciation deduction (you do not own it)
Capital lease: Similar to buying - depreciation plus interest
$1 buyout lease: May qualify for Section 179 at inception

Timing Matters

If you need a large deduction this year, buying with Section 179 provides immediate deduction. If you want to spread deductions evenly, an operating lease provides consistent annual deductions. Your tax situation should influence your financing choice.

Maximizing Tax Benefits: Practical Strategies

Consider these strategies to optimize the tax benefits of equipment purchases.

Time purchases strategically: Equipment must be placed in service by December 31 to claim deductions for that tax year
Combine with bonus depreciation: Use Section 179 up to income limits, then apply bonus depreciation to remainder
Consider your income: Section 179 requires sufficient business income; bonus depreciation can create losses
Track business use: Equipment must be used more than 50% for business to qualify for Section 179
Document everything: Keep purchase invoices, financing documents, and records of when equipment was placed in service
Review annually: Tax laws change - what worked last year may not be optimal this year

Common Tax Mistakes to Avoid

Avoid these common errors when claiming equipment tax benefits:

Missing the placed-in-service deadline: Equipment ordered in December but delivered in January counts for the following year
Forgetting business use requirements: Personal use over 50% disqualifies Section 179
Ignoring state rules: Many states have different Section 179 limits or do not allow bonus depreciation
Poor record keeping: You need documentation to support deductions if audited
Not considering alternative minimum tax (AMT): Some deductions may trigger AMT
Claiming deductions you do not qualify for: Work with a tax professional to verify eligibility

State Tax Variations

State tax treatment often differs from federal. Some states limit Section 179 to lower amounts, do not allow bonus depreciation, or require different depreciation schedules. Your state tax situation should factor into your analysis.

Real-World Example

Let us look at how tax benefits might work for a $200,000 equipment purchase financed over 5 years.

Item	Amount	Tax Savings (30% rate)
Equipment cost	$200,000	-
Section 179 deduction (year 1)	$200,000	$60,000
Total interest paid (5 years)	$42,000	$12,600
Total tax savings	-	$72,600
Effective cost after tax benefits	-	$169,400

Significant Effective Discount

In this simplified example, tax benefits reduce the effective cost by over $70,000, making the $200,000 equipment effectively cost about $170,000. Your actual savings depend on your tax situation, state taxes, and eligibility for various deductions.

Working With Your Tax Professional

To maximize equipment tax benefits, involve your tax advisor early in the decision process.

Discuss major equipment purchases before you buy
Review whether Section 179 or bonus depreciation is better for your situation
Understand how the deduction affects your overall tax position
Consider timing of the purchase relative to your tax year
Evaluate lease vs buy from a tax perspective
Plan for state tax implications
Document business use percentage
Keep records organized for potential audit

Year-End Planning

Schedule a year-end tax planning meeting with your accountant. If you have equipment needs and sufficient income, making a purchase before December 31 could significantly reduce your current year tax bill.