26 Jun Tax Advantages of Equipment Financing for Your Company
Equipment financing offers a decisive advantage that often gets overlooked: tax savings.
Whether you’re financing heavy machinery, vehicles, or technology upgrades, the IRS provides incentives that can significantly reduce your tax liability if you and your equipment financing company structure it the right way. The key to keeping your cash flow healthy and rewarding yourself come tax season is knowing what deductions are available and how to qualify for them.
Section 179: The Small Business Tax Hero
One of the most valuable tools you use when financing equipment is Section 179 of the IRS Tax Code. This provision allows you to deduct the full purchase price of qualifying equipment or software you’ve leased during the tax year.
To qualify, your business needs to use the equipment more than 50% of the time, starting the same year you claim the deduction. The IRS also caps the overall deduction amount at $100,000. But if you meet those requirements, the deduction can be a game-changer for your taxable income.
Suppose you financed a $75,000 printer system for your commercial printing business in March. If you start using the equipment a few months later, you could deduct the entire cost of the printer from your taxable income. Section 179 means lower taxes now, not five or ten years from now.
Bonus Depreciation: Going Beyond the Basics
Another benefit, bonus depreciation, allows you to write off an even larger chunk of your equipment investment. In recent years, the IRS has made this provision particularly favorable to encourage capital investment, especially among growing businesses.
Bonus depreciation lets you deduct the remaining balance immediately instead of waiting to depreciate the remaining equipment value over time. This is especially useful if your purchases exceed the limits of Section 179, like for large-scale operations. You could deduct up to 100% of the equipment costs in the first year.
Let’s combine these two tax strategies for the most powerful result. Say your commercial printing business is opening a new location and financing multiple machines in one year. You could use Section 179 on the $75,000 printer system and bonus depreciation to write off the remaining balance on the rest of the equipment. All your equipment investment rewards you in the year you finance it with bonus depreciation.
Financing Still Qualifies, Even If You Don’t Own It Outright
One of the biggest misconceptions about equipment financing is that you can’t take advantage of tax deductions. In reality, the IRS allows you to take the whole Section 179 deduction and apply bonus depreciation if you’re financing the purchase, so long as the equipment is in service and meets qualification requirements.
That means you can deduct the full cost of the equipment while you continue making monthly payments over several years. That’s especially important when balancing payroll, overhead, and operational expenses. It’s a strategy that lowers your taxable income and helps preserve your working capital by leveraging tomorrow’s payments for today’s tax relief.
Lease Structures Can Offer Tax Breaks Too
Equipment leases offer distinct tax benefits compared to traditional financing. The type of benefit depends on which of the two general structures you use. Working with your business lending broker to match the leasing structure to your business’s cash flow, tax bracket, and long-term goals can increase your flexibility in claiming tax benefits.
The two ways an equipment lease is structured and offers you tax breaks are through claiming business expenses or depreciation. An operating lease is structured where you are technically renting the tools. Because you do not own the tools, you can claim the monthly lease payments as business expenses. Alternatively, a capital lease (or a finance lease) treats the equipment as an owned asset. You claim depreciation deductions each year you lease your equipment, similar to a financed purchase.
Whichever structure best suits your business, you’ll reduce your taxable income while acquiring the tools your business needs to grow.
Lower Taxes Mean Stronger ROI
When you leverage these tax benefits properly, equipment financing can significantly improve your return on investment (ROI). You get to use the equipment immediately, preserve your cash, and reduce your tax liability simultaneously. That triple benefit gives you an edge when expanding your business or modernizing outdated systems. And because the tax benefits often kick in immediately, you can experience ROI much sooner than with other financing strategies.
Collaborating with a Tax Advisor or Lender
A common mistake is waiting until tax season to work with a qualified tax professional or financing advisor. We know that taxes are unpleasant things we’d rather put off. Planning with an expert early can help you meet the eligibility criteria for Section 179 and bonus depreciation, assist with documentation, and forecast your year-end tax liability more accurately.
Some lenders, especially private lenders for business, can offer guidance or even pre-structured financing products that align with Section 179. If you’re unsure whether to finance, lease, or buy outright, your lender can help you run the numbers to see which option makes the most sense.
By planning ahead, you can time your purchases, structure your lease or loan in the most tax-efficient way possible, and prepare for tax season more effectively.
Don’t Leave Money on the Table
You don’t need to drain your bank account to benefit from owning or leasing high-value equipment. With your understanding of the major deductions available, you can better structure your next equipment acquisition to give you flexibility, control, and access to powerful tax incentives.