Section 179 and Bonus Depreciation for Leased Equipment: What to Know

Section 179 and bonus depreciation let many businesses deduct the cost of qualifying equipment in the year it is placed in service rather than over many years. They generally apply when you are treated as the tax owner of the equipment, which means purchases, equipment loans and leases that are structured as conditional sales, such as many $1 buyout leases. They generally do not apply to a true rental-style lease such as most FMV leases, where you instead deduct the lease payments as an ordinary business expense. The rules and dollar limits have changed recently, so confirm current numbers with the IRS and your CPA before you decide anything.

What each provision does

Section 179 expensing. Section 179 of the Internal Revenue Code lets a business elect to deduct the cost of qualifying property up to an annual limit, rather than depreciating it. The deduction is limited by the business's taxable income from active trade or business, and it phases out once total qualifying purchases for the year exceed a threshold. Tangible personal property used in a business, such as machinery, many vehicles within special limits, computers and certain software, commonly qualifies.

Bonus depreciation. Bonus depreciation allows an additional first-year deduction of a percentage of the cost of qualifying property. Unlike Section 179, it is not limited by taxable income, so it can create or increase a net operating loss. Legislation enacted in 2025 changed both the Section 179 limits and the bonus percentage. As of this writing, federal law provides for a much higher Section 179 limit than in prior years and restored 100 percent bonus depreciation for qualifying property acquired after January 19, 2025. The Section 179 amounts are indexed for inflation, so the exact limit for tax year 2026 should be checked in current IRS guidance rather than taken from an article.

Which leases may qualify

The IRS looks at the substance of the agreement. A lease is more likely to be treated as a conditional sale, with the lessee as owner for tax purposes, when features such as these are present:

• A $1 or other nominal purchase option at the end of the term.
• Payments that cover most of the equipment's value and a market rate of interest.
• A lease term that covers most of the equipment's useful life.
• Title that passes to the lessee automatically.

An FMV lease where the lessor keeps the residual risk and you may simply return the equipment is typically a true lease, so the lessor claims depreciation and you deduct the payments. Because labels can mislead, do not choose a lease structure only because a salesperson says it qualifies. Ask the lessor and your CPA to confirm in writing how the transaction will be treated.

A worked example

Assume a business buys or finances $100,000 of qualifying machinery and places it in service this year. Suppose its federal and state marginal tax rate combined is 28 percent (illustrative; your rate will differ).

• Full expensing in year one: a $100,000 deduction at 28 percent reduces taxes by about $28,000 in that year.
• Ordinary depreciation over seven years (for comparison): if deducted evenly, about $14,286 a year, saving about $4,000 a year at the same rate. The total deduction is the same, but the timing differs.
• FMV lease payments of about $1,450 a month: deductible as paid, about $17,400 a year. At 28 percent, that is about $4,872 of tax savings a year.

The timing benefit is real, but it is not a discount on the equipment. The business still pays for the machine; it simply pays less tax now. You can enter an estimated benefit in the "tax savings" field of the equipment ROI calculator to see how it shifts payback, remembering that this is a planning estimate.

Limits and traps to know about

• Taxable income limit. The Section 179 deduction cannot exceed taxable business income, with carryforward of the excess. A business with little profit may gain more from a different approach.
• Business use. The equipment must be used predominantly for business, generally more than 50 percent. Vehicles have additional rules, and heavy vehicles and light vehicles are treated differently.
• Placed in service. The deduction applies when the equipment is ready and available for use, not simply when you sign the lease. A delivery delay into the next year can shift the deduction.
• Recapture. If business use falls below the required threshold, part of the deduction may be recaptured as income.
• State differences. Some states do not conform fully to federal Section 179 or bonus depreciation rules.
• Leased property from a related party or sale-leaseback. These raise additional questions and need professional review.
• Alternative minimum tax and other rules. Different taxpayers may face different interactions, so a CPA should model the result.

Questions to ask your CPA before signing

1. Will this agreement be treated as a purchase or a true lease for tax purposes?
2. Given my expected taxable income this year and next, is first-year expensing better than spreading deductions?
3. What are the current Section 179 and bonus depreciation limits for the year the equipment will be placed in service?
4. Does my state follow the federal treatment?
5. Do any business-use or vehicle limits apply?

Using the tax benefit wisely in lease decisions

Do not let the tax tail wag the dog. A deduction reduces the cost of equipment you actually need; it does not make unneeded equipment profitable. Start with the business case: how much additional income or savings the equipment will produce. Then use tax treatment to choose between structures. Our guide on leasing versus borrowing or paying cash shows how to compare them on equal footing.

Frequently asked questions

Can I take Section 179 on a leased vehicle?

Possibly, if the lease is treated as a purchase for tax purposes and the vehicle qualifies and is used predominantly for business. Limits apply to passenger vehicles and some SUVs. Confirm details with your CPA.

Do I need to buy the equipment to use Section 179?

Not always. What matters is that you are treated as the owner for tax purposes, which can occur with certain leases and financed purchases.

Is year-end purchasing a good idea?

It can be if the equipment is placed in service by year-end and fits your business plan, but buying equipment only for a deduction is rarely a good reason.

Sources and further reading

• Internal Revenue Service — Publication 946 (How to Depreciate Property) and Form 4562 instructions.
• Small Business Administration — small business tax and financing resources.
• Equipment Leasing and Finance Association — updates on tax legislation affecting equipment finance.