Section 179 & Bonus Depreciation: Deducting Financed Equipment

Section 179 of the IRS tax code allows businesses to deduct the full purchase price of qualifying equipment and software in the year it's placed in service, rather than depreciating it over several years. The 2024 deduction limit is $1,160,000, with a phase-out beginning at $2,890,000 in total equipment purchases.

The critical point: you don't have to pay cash to claim Section 179. If you finance $300,000 of equipment, you can deduct the full $300,000 in year one — even though you only made a few monthly payments. The deduction is based on the cost of the equipment, not how much you've paid.

Section 179 applies to new and used equipment, as well as certain software. It does not apply to real property (buildings), though certain building improvements qualify under a separate provision.

Bonus depreciation is a separate provision that allows businesses to immediately deduct a percentage of the cost of qualifying property in the year it's placed in service. Unlike Section 179, bonus depreciation has no dollar cap and no phase-out based on total purchases — it applies to the full cost of qualifying property regardless of how much you spend.

The bonus depreciation rate has been phasing down since 2023:

Congress has periodically extended and modified bonus depreciation. Consult your CPA for the current rules applicable to your tax year.

Both provisions can be used in the same year, and they work together. The typical strategy is to use Section 179 first (up to the limit), then apply bonus depreciation to any remaining cost. Here's how they differ:

Section 179: Limited to $1.16M (2024). Cannot create a tax loss — the deduction is limited to your business taxable income. Can be applied selectively to specific assets. Applies to new and used property.

Bonus depreciation: No dollar cap. Can create a net operating loss (NOL) that carries forward. Applies to all qualifying property placed in service during the year — you can't pick and choose individual assets. Applies to new and used property (used property must be new to you).

For most businesses, the combination of both provisions means you can deduct the full cost of financed equipment in year one, regardless of the purchase price.

It depends on the lease structure:

$1 buyout lease (finance lease): Yes. Because you own the equipment at the end for $1, the IRS treats this as a purchase. You can claim Section 179 and bonus depreciation on the full equipment cost in year one.

Equipment loan: Yes. You own the equipment from day one. Full Section 179 and bonus depreciation apply.

FMV lease (operating lease): Generally no for Section 179 and bonus depreciation, because you don't own the equipment. However, FMV lease payments are typically fully deductible as a business operating expense — which can be equally valuable depending on your tax situation.

The right structure depends on your tax position. LeaseSource can model both scenarios so you can see the after-tax cost of each option before you decide.

Your business finances $250,000 of manufacturing equipment on a $1 buyout lease. Monthly payment: approximately $4,800/month over 60 months.

Without Section 179: You depreciate $250,000 over 7 years (MACRS), deducting roughly $35,700/year. At a 25% tax rate, that's about $8,900/year in tax savings.

With Section 179: You deduct the full $250,000 in year one. At a 25% tax rate, that's $62,500 in tax savings — in the first year alone. Your effective net cost of the equipment drops from $250,000 to $187,500.

The monthly payment stays the same either way. The difference is when you get the tax benefit — and for most growing businesses, getting $62,500 back in year one is far more valuable than spreading it over 7 years.