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Bonus Depreciation for Equipment

Bonus Depreciation for Equipment. Comprehensive guide covering the topic in depth, with worked examples, current data, and cross-references.

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Year-aware content. Refreshed annually with current limits, rates, and regulatory changes. Last reviewed May 29, 2026.

Bonus depreciation is an additional first-year deduction available on top of Section 179. Authorized under IRC §168(k), it currently allows 40% additional deduction in 2025 (declining through 2027 under current law).

How it works

Bonus depreciation applies to qualifying property after Section 179 is exhausted. The calculation:

  1. Equipment cost minus Section 179 deduction = remaining basis
  2. Remaining basis × bonus percentage = bonus deduction
  3. Basis after bonus depreciation is subject to MACRS

Bonus depreciation phase-down

Year placed in service Bonus %
2017 (after Sept 27) 100%
2018-2022 100%
2023 80%
2024 60%
2025 40%
2026 20%
2027 and beyond 0% (under current law)

Congress could extend or restore higher bonus depreciation. Check current law before planning multi-year strategies.

What qualifies

Qualifying property includes:

  • Tangible personal property with recovery period of 20 years or less
  • Computer software (off-the-shelf, depreciated)
  • Qualified Improvement Property
  • Certain plants bearing fruits and nuts
  • Film, television, and theatrical productions (specific rules)

Used property qualifies (as long as new to you and not acquired from related party).

What does NOT qualify

  • Property used 50% or less for business
  • Real property with recovery period over 20 years (buildings)
  • Land
  • Inventory
  • Property acquired in a like-kind exchange
  • Property received as gift or inheritance

Key differences from Section 179

Feature Section 179 Bonus depreciation
2025 limit $1,250,000 40% of basis, no dollar cap
Income limitation Cannot exceed taxable income Can create NOL
Election Optional per property Default applies to qualifying property unless opted out
Carryforward Unused carries forward Creates NOL that carries forward
Phase-out At $3.13M purchases None

Worked example

$300,000 equipment purchase in 2025. Section 179 fully used.

  • Section 179: $300,000? No, depends on taxable income
  • Suppose taxable income $200,000, so Section 179 = $200,000
  • Remaining basis: $100,000
  • Bonus depreciation: $100,000 × 40% = $40,000
  • Remaining basis: $60,000
  • Year 1 MACRS (5-year): $60,000 × 20% = $12,000
  • Total year 1 deduction: $200K + $40K + $12K = $252,000
  • Net loss after deduction: $200K – $252K = -$52,000 (NOL carries forward)

Electing out of bonus depreciation

You can elect out of bonus depreciation on a class-by-class basis. Reasons to elect out:

  • You want to preserve future-year deductions
  • State conformity issues penalize bonus depreciation
  • You prefer MACRS smoothing
  • You want to avoid creating a net operating loss

Election made by attaching statement to tax return.

State conformity

Many states do not conform to federal bonus depreciation:

  • Some states decouple entirely (no bonus depreciation for state tax)
  • Some states allow 50% bonus or other percentages
  • Some states require add-back over multiple years

States with bonus depreciation decoupling include New York, New Jersey, California, Pennsylvania, North Carolina, and others. Talk to your CPA.

Like-kind exchange interaction

The Tax Cuts and Jobs Act eliminated like-kind exchanges for personal property in 2018. Equipment cannot be exchanged tax-free. The full sale price of traded equipment is recognized as gain, and the new equipment’s basis is its purchase price (not net of trade).

This means more equipment cost is eligible for bonus depreciation in trade-in scenarios than under prior law.

Section 179 vs bonus depreciation strategy

Decision factors:

  • Income limitation: If Section 179 would exceed taxable income, use bonus instead (which can create NOL)
  • Total cost: If above Section 179 limit, use bonus on excess
  • Multi-year planning: If next year’s income will be higher, defer some current-year deductions
  • State conformity: If state penalizes bonus, lean Section 179

For deep dive, see Section 179 vs bonus depreciation strategy.

Common mistakes

  • Forgetting bonus depreciation is automatic unless opted out
  • Not optimizing the Section 179 + bonus stacking order
  • Missing state conformity differences
  • Failing to track different federal and state depreciation schedules
  • Buying equipment you do not need just to chase the deduction

Action steps

  1. Project current-year taxable income
  2. Plan Section 179 election based on income limit
  3. Calculate bonus on remaining basis
  4. Confirm state conformity implications
  5. Track placed-in-service date carefully
  6. Document on Form 4562
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Editorial review by Ed Stapleton Jr. · Founder & Editor

How we evaluate this and what to watch for

What we weigh on this

When we evaluate an application affected by this topic, we look at a small set of factors that drive most of the decision. The four below are the ones that move the rate.

  • Owner background and depth. Years of related industry experience, prior ownership of similar equipment, and any documented success operating the asset class affect review. New entrants to a class price differently from established operators expanding within their lane.
  • Equipment as collateral. The equipment itself secures the loan. Asset class, age, condition, configuration, and resale market depth all factor into how lenders advance against the cost.
  • Use of equipment. Will the asset generate revenue immediately, will it replace an existing producing asset, or is it additive capacity. Revenue-replacement deals close most easily.
  • Personal credit of principals. For owners with 20 percent or more equity, personal FICO drives both the available program and the rate. The pull is soft at prequalification, hard at formal application with the chosen lender.

Where this goes sideways for borrowers

Every issue below is preventable. The patterns recur not because of bad faith but because borrowers sign documents they have not fully read. The cost of catching these at the application stage is zero.

Vendor financing disguised as direct

Some equipment dealers present vendor-arranged financing as the only path, when independent equipment lenders would beat the rate by 1 to 3 points for the same borrower. Always get at least one independent quote before accepting dealer financing on a transaction over $50,000.

Late payment cascading fees

A 10-day late payment on an equipment loan typically triggers a late fee of 5 to 10 percent of the payment amount. Some contracts also trigger default interest, which jumps the rate by 4 to 6 points until the account cures. The dollar impact of a single missed payment can run into the hundreds.

Doc fee surprises

Lender documentation fees range from $150 on the low end to $1,500 or more on larger transactions. These are disclosed in the funding documents but easy to skim past. Ask up front what the doc fee is, and whether it is being added to the financed amount or paid out of pocket at funding.

EFA versus loan documentation differences

An Equipment Finance Agreement looks like a lease to a casual reader but behaves like a loan. Buyers who do not understand the structure sometimes try to apply lease-specific tax treatment to an EFA, or vice versa. Read the structure on the front page of the funding documents and confirm with your CPA before electing tax treatment.

What to verify before you sign

Lender funding documents reference the equipment and the transaction terms. Catching gaps between what was discussed and what is documented saves real money. The items below cover what to confirm before signing.

  • Service history complete. Maintenance records back to first owner where possible. Gaps in service history reduce both lender comfort and resale value.
  • Recall and campaign status. Manufacturer recalls and service campaigns sometimes go uncompleted on used equipment. Verify outstanding recalls before purchase; some are mandatory and prevent the equipment from being registered or operated in certain jurisdictions until completed.
  • Inspection by independent third party. For used equipment over $50,000, an independent mechanical inspection runs $300 to $800 and surfaces issues a walk-around will not catch. Lenders often require this for used equipment above a threshold.
  • Comparable sales data. Pricing checked against recent comparable sales from auction sites, dealer listings, and trade publications. A unit priced 15 percent above market signals either a premium configuration or a seller hoping the buyer does not check.
  • Emissions compliance. For diesel-powered equipment, confirm the unit meets current emissions requirements for the state and operation it will be used in. Tier 4 final compliance, urea/DEF system status, and after-treatment health all affect both legality of use and resale value.

Questions to think through

Can a startup with no revenue history finance equipment?
Limited paths, but they exist. Startup programs typically require larger down payment (15 to 30 percent), personal guarantee, and sometimes proof of contract, signed lease, or other evidence the equipment will produce revenue. Personal credit and personal financial strength carry more weight than they would for an established borrower.
Do I have to insure the equipment for the full loan amount?
Yes. Physical damage coverage at the financed amount is standard, plus liability if applicable to the equipment class. The lender is named as loss payee for the life of the loan. Verify the coverage language meets the lender requirements before funding.
Can I pay off the loan early?
Yes, but check the pre-payment provision in your documents. Some structures carry a pre-payment penalty in the first 12 to 36 months. Others are open. Knowing the payoff math before signing prevents surprises if you decide to refinance or sell out of the equipment early.
Can I sell the equipment before the loan is paid off?
Yes, but you need lender consent and a clear plan to pay off the remaining loan balance. The standard path: sell the equipment, use the proceeds plus any out-of-pocket to satisfy the lender payoff, lender releases the lien. The DMV processing for titled equipment adds time on the back end.
Is there a minimum or maximum loan size?
Our programs run from a $10,000 minimum up to several million on a single transaction. The mid-range (roughly $25,000 to $500,000) is our deepest financing review and best pricing.
What if the equipment will be cross-border or international?
Equipment that crosses an international border in the course of business (cross-border trucks, certain aviation) is financeable but requires the lender to confirm coverage in the equipment use. Cross-border use can also affect insurance, registration, and apportioned licensing.

How we structure financing

The financing structure that fits depends on the actual situation. Below are the most common decision branches we walk through with buyers, in plain "if X, then Y" form.

If You have access to manufacturer captive promotional financing
Then Compare carefully against bank/independent lender rates. Captive promotions sometimes look better on stated rate but include adjustments (lower discount, required service bundles) that change the net economics.
If Your equipment is part of a larger build-out project
Then Get bundled financing across the full project (equipment + infrastructure + integration) on single paper when possible. Bundled programs typically beat piecemeal financing on rate and approval probability.
If Your credit is below 640 and TIB is under 24 months
Then Plan for 15 to 25 percent down, full personal guarantee, and a specialty program. Rates run 4 to 8 points above prime. Approval is still real but the structure is meaningfully different from prime programs.
If You are buying equipment from a private seller
Then Use a title services provider or escrow for the title transfer. We will not fund until title is clear; an escrow arrangement protects both buyer and seller during the title transfer window.
If You expect to pay the loan off within 12 months
Then Check the pre-payment penalty before signing. Standard structures penalize early payoff in year one. Open pre-payment loans cost slightly more in stated rate but eliminate the penalty.

Timeline expectations

What actually happens day-by-day, from application to equipment in service. Most buyers underestimate one or two of these steps; knowing them up front prevents surprises.

Refinancing existing equipment loan
2 to 4 weeks
Refinancing requires payoff of existing loan, UCC release from prior lender, and funding of new loan. The UCC release coordination drives most of the timing.
Title transfer on titled equipment
1 to 4 weeks
Title transfer through state DMV adds weeks to closing on titled equipment. Out-of-state transfers run on the longer end. Title escrow accelerates this in many cases.
Insurance binder issuance
Same-day to 24 hours
Commercial auto and equipment insurance binders typically issue same-day from existing carriers. New policies for new businesses can run 2-5 business days to bind.
Document signing to funding
1 to 3 business days
Lender operations team processes signed docs, files UCC, and funds the seller. Wire transfers funded same-day if processed before cutoff.
Full financing review on complex deals
5 to 10 business days
Larger transactions ($500K+) or specialty deals (medical imaging, aerospace, mining) often require deeper review. Plan funding date 2-3 weeks out for these.
Placed-in-service date documentation
Same-day as commissioning
For Section 179 and depreciation purposes, the placed-in-service date is when the equipment is delivered, installed, and operationally ready. Document this date carefully for tax purposes.

Cost stack: what total ownership actually includes

The equipment purchase price is one line on the financed amount. The actual cost of ownership over the life of a bonus depreciation for equipment deal includes the items below. Buyers who only budget for the purchase price often hit cash-flow surprise within the first 12 months.

  • Insurance premiums. Commercial equipment insurance with lender named as loss payee. Annual premiums run 1 to 5 percent of equipment value depending on coverage and equipment category.
  • Storage and security infrastructure. Indoor storage, security systems, and theft-prevention measures. Particularly important for landscape, construction, and small equipment frequently stored outdoors and at job sites.
  • Operator training. Manufacturer-provided or third-party operator training. Runs $1,500 to $25,000 depending on equipment complexity. OSHA-compliant training required on many categories.
  • Delivery and freight. Equipment delivery from dealer to operating site. Runs 1 to 5 percent of equipment price on standard equipment, higher on heavy or oversized equipment requiring permits and escorts.
  • Sales or use tax. State and local sales tax on the equipment. Rolls into financed amount in most states. Manufacturing and qualifying exemptions reduce or eliminate this in many states.
  • End-of-term residual or buyout. Lease structures: fair market value buyout at term end (FMV lease) or stated residual amount (TRAC lease). Loan/EFA structures: $1 buyout or no buyout. Plan for this from day one on lease structures.
  • Title transfer and registration. Titled equipment (trucks, trailers, some construction equipment) requires title transfer and registration. State-specific fees from $50 to $500+.
  • UCC-1 filing fees. $5 to $84 depending on state. Paid at filing; some lenders absorb, some pass to borrower.

Authoritative sources

The rate ranges, structures, and program details on this page are informed by our internal financing book and the public industry resources below. We link out so you can verify any specific claim or go deeper.

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Reviewed by

Ed Stapleton Jr.

Founder & Editor

Ed Stapleton Jr. is a serial entrepreneur who has started or acquired over a dozen businesses. He founded Fund My Equipment as the resource he wished he had along the way.

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