Section 179 and Bonus Depreciation on Financed Equipment

August 8, 2026 · 6 min read · Equipment Funding Network

If you finance equipment, you can generally still deduct the full purchase price in year one. The deduction follows ownership and the in-service date, not how much cash you put down. What actually decides whether it works is the structure of the paperwork you sign and whether the equipment is genuinely placed in service before your tax year closes.

The deduction follows the equipment, not the cash

Section 179 lets you deduct the cost of qualifying equipment in the year you place it in service instead of writing it off over five or seven years. Bonus depreciation gets to a similar place under different rules. Neither one asks how you paid for it.

Say you buy a used excavator for $180,000 on December 15, nothing down, 60-month term, first payment due February 1. If everything else lines up, you have a $180,000 deduction on that year's return and you have written almost no checks. That is why dealer phones do not stop ringing in the fourth quarter.

The interest portion of your payments is generally deductible separately as a business expense as you pay it. The principal is not. That is already accounted for in the depreciation you took up front.

A loan and a lease are not the same thing here

For tax purposes the depreciation belongs to whoever owns the equipment. Equipment paperwork comes in two broad flavors, and the difference decides who gets the write-off.

• Equipment finance agreement (EFA), conditional sale contract, $1 buyout lease, capital lease: you are treated as the owner, and you take Section 179 or bonus depreciation. Most equipment loans in this industry are one of these.
• True lease, fair market value lease, operating lease, most TRAC structures: the funding source owns it. You do not take Section 179. You deduct the lease payments as an operating expense instead.

Neither structure is wrong. But if you signed a true lease expecting a big write-off, you find out in March, and by then it is done.

The word lease shows up on both kinds of document, so do not go by the title on the page. Ask the funding source in writing: is this a structure where I take the depreciation, or one where I deduct the payments? Any legitimate funding source answers that in one sentence.

Placed in service is the deadline. Not ordered, not paid for, not delivered.

This is the one that costs people the deduction, and it is almost always a December problem. Property is placed in service when it is ready and available for its specific assigned use in your business. You do not have to have run a single hour on it. It has to be in a condition where you could.

• Skid steer delivered to your yard on December 29, insured and fueled, sitting until the ground thaws. Generally placed in service. It is ready.
• CNC machine that landed December 28 but is still crated, waiting on an electrician and a runoff. Generally not. It cannot do its job yet.
• Truck you signed for on December 30 that is still on a lot three states away waiting for transport. You have a problem.
• Deposit paid in December on a machine arriving in March. No deduction this year. Ordering and paying are not placing in service.
• Restaurant hood, dental chair, or imaging equipment that needs install, calibration, and an inspection sign-off. The sign-off date is often the real date, and it is often January.

Rule of thumb: the more installation, wiring, permitting, or commissioning a piece of equipment needs, the earlier it has to be on site. A machine you plug in is easy. A machine that needs three trades and a city inspector is not.

Document the date while it is happening. Delivery receipt, install sign-off, insurance binder effective date, registration, dated photos. If the in-service date is ever questioned, that folder is your answer, and reconstructing it two years later is miserable.

Year-end is also the worst time to start an application

Credit desks run short-staffed through the holidays. Funders set wire cutoffs days before the 31st. Titled equipment needs registration and lien perfection through a state office that is also closed. A private-party purchase needs an inspection, a lien payoff on the seller's side, and a seller who answers the phone between Christmas and New Year's.

If a year-end deduction matters to you, start three to four weeks out at minimum, longer if the equipment is titled, coming from a private seller, or needs installation. Deferred first-payment structures are common in the fourth quarter and worth asking about, but they do not fix a late start.

The limits that actually bind

Section 179 has three separate ceilings, and small businesses usually hit the third one, not the first.

• Dollar cap. Federal legislation in 2025 reset the Section 179 cap to $2.5 million, with the phase-out starting at $4 million of qualifying property placed in service, effective for tax years beginning after 2024 and indexed for inflation since. Get the current-year figures from your CPA, because they move.
• Phase-out. Once total qualifying property placed in service in the year passes the threshold, the cap drops dollar for dollar. Push far enough past it and Section 179 disappears entirely.
• Taxable income limitation. This is the one that catches owner-operators and small shops. Section 179 cannot create or increase a loss from your active business. If your business taxable income is $60,000, your Section 179 deduction is capped there no matter what you bought. Business taxable income for this test is defined more broadly than your Schedule C bottom line and can include wage income, so ask your CPA where you actually land. The unused amount carries forward indefinitely, but it does not help this year's return.

A few other rules worth knowing. Business use has to be more than 50 percent, and the deduction is reduced proportionally for partial business use. Used equipment qualifies for both Section 179 and bonus depreciation as long as it is new to you and not bought from a related party, which matters a lot in trucking, construction, and ag. Qualifying property covers tangible business personal property, off-the-shelf software, and certain improvements to nonresidential buildings like roofs, HVAC, fire protection, and alarm systems. Land and the building itself do not qualify.

And check your state. Plenty of states cap Section 179 well below the federal number or decouple from bonus depreciation entirely. A clean federal write-off does not automatically follow you onto the state return.

Section 179 versus bonus depreciation

One hundred percent bonus depreciation was made permanent in 2025 for property acquired after January 19 of that year. It lands in a similar place as Section 179 but behaves differently, and the differences are why your CPA may use one, the other, or both.

• Bonus has no dollar cap and no phase-out threshold.
• Bonus has no taxable income limitation. It can create or increase a loss. Section 179 cannot.
• Bonus applies automatically to every qualifying asset in a class unless you elect out, and electing out covers that whole class for the year. Section 179 is surgical: you pick which assets and how much.
• Order of operations runs Section 179 first, then bonus on whatever basis is left, then regular depreciation.

Which combination is right depends on your income this year, your state, your entity type, and what you expect to buy next year. That is a conversation with your CPA, not a rule.

A deduction is not a check, and it borrows from next year

Two things get said constantly on the sales side and both are misleading.

The first is that the write-off pays for the equipment. It does not. A deduction reduces taxable income, not tax. Its value to you is roughly your marginal rate applied to the deduction. Writing off $100,000 saves you your rate on $100,000, not $100,000.

The second is that it is free money. It is a timing shift. Take the entire cost in year one and years two through six have no depreciation left on that asset, only the interest, while you are still making the full payment every month. Your taxable income in those years is higher than it would have been. That is completely fine when it is planned. It is an ugly surprise when it is not. Have your CPA look at the whole term, not just this December.

Selling or trading the equipment later can trigger depreciation recapture, taxed as ordinary income. So can business use dropping to 50 percent or less partway through. A truck you wrote off in full and sold in year three can generate a real tax bill.

And the obvious one that still needs saying: never buy equipment you do not need in order to get the deduction. Spending a dollar to save thirty-some cents is still spending a dollar.

Vehicles have their own rules

Work trucks over 14,000 pounds GVWR, and vehicles with no realistic personal use, are generally outside the passenger-vehicle limits. That covers most of what this audience buys: dump trucks, day cabs, service bodies, cargo vans with no seating behind the driver, and pickups with a cargo bed of at least six feet.

SUVs and pickups between 6,000 and 14,000 pounds GVWR have a separate, much lower Section 179 cap that adjusts annually. Passenger cars under 6,000 pounds are limited hardest of all. Trailers and attachments are equipment, not vehicles, and are not subject to those caps.

Get the GVWR off the door jamb sticker, not the brochure. The number on the truck is the number that counts.

What to do before year end

1. Call your CPA before you shop. Ask what a large deduction is actually worth to you this year given your income, and whether Section 179, bonus, or a mix fits.
2. Confirm the financing structure in writing. EFA or capital lease if you want the depreciation, true lease if you want to expense the payments.
3. Start the financing three to four weeks out, longer for titled or private-party deals.
4. Get the equipment delivered, installed, functional, and insured before the year closes. Not ordered. Not paid for. Working.
5. Save the delivery receipt, install sign-off, insurance binder, registration, and dated photos in one folder.
6. Check your state's treatment before you count on the number.

If the deal makes sense on its own without the tax treatment, the deduction is a good reason to do it this year instead of next. If it only makes sense because of the deduction, that is your signal to wait.

If you need financing lined up to get equipment placed in service before year end, start early rather than in the last week. Equipment Funding Network routes your request to lenders in equipment finance and lets them come back to you with terms. We do not underwrite, set rates, make credit decisions, or give tax advice. We just get the conversation started early enough that the calendar is not the thing that costs you the deduction.

Common follow-up questions

Can I take Section 179 if I financed the equipment with nothing down?
Generally yes. The deduction is based on the equipment's cost and its in-service date, not on how much cash you paid. The financing has to be a structure where you are treated as the owner, such as an equipment finance agreement, conditional sale contract, or $1 buyout lease. Confirm your specific deal with your CPA.

Does used equipment qualify for Section 179 and bonus depreciation?
Yes. Used equipment qualifies for both as long as it is new to you and not purchased from a related party. That covers most used trucks, trailers, excavators, and shop machinery. Your CPA can confirm how the related-party rules apply to your situation.

The equipment was delivered December 30 but I will not use it until spring. Does it still count?
Usually yes. The test is whether the equipment is ready and available for its assigned use, not whether you actually used it. The problem cases are machines that still need installation, wiring, calibration, or an inspection sign-off, because those are not ready until that work is finished.

Can Section 179 create a tax loss?
No. Section 179 is limited to your business taxable income and cannot create or increase a loss. Anything over that limit carries forward to future years. Bonus depreciation has no taxable income limitation and can create a loss, which is one reason a CPA may use bonus instead of, or in addition to, Section 179.