# Tax Treatment of Equipment Loans Canonical URL: https://fundmyequipment.com/learn/tax-treatment-equipment-loan/ Last modified: 2026-05-29T19:39:17+00:00 Type: efin_guide ## Summary Tax Treatment of Equipment Loans. Comprehensive guide. ## Content Equipment loans give you ownership and a path to claim depreciation, interest deduction, and Section 179. The tax treatment is different from leasing in important ways. This is a general overview, not tax advice. Confirm specifics with your accountant. The three deductions on a financed equipment purchase 1. Depreciation When you own equipment, you depreciate it over its IRS-defined useful life (typically 5 or 7 years for most business equipment under MACRS). Annual depreciation reduces taxable income. Standard MACRS depreciation for 5-year property follows a declining-balance schedule: 20% year 1, 32% year 2, 19.2% year 3, 11.52% years 4 and 5, and 5.76% year 6. 2. Section 179 Section 179 lets you deduct the full purchase price of qualifying equipment in the year you place it in service, up to the annual limit. The 2025 limit is $1,250,000 with a phase-out beginning at $3,130,000 of total qualifying purchases. To qualify, you must: Use the equipment more than 50% for business Place it in service during the tax year Buy it (financing counts), not lease it as an operating lease The deduction cannot exceed your taxable income, but unused Section 179 carries forward. 3. Bonus depreciation Bonus depreciation under ยง168(k) lets you deduct an additional percentage of remaining basis after Section 179. The 2025 bonus rate is 40%, scheduled to drop to 20% in 2026 and zero in 2027 absent congressional action. 4. Interest Interest paid on the equipment loan is deductible as a business expense in the year paid, separate from depreciation and Section 179. How the stack works in practice Suppose you finance $200,000 of equipment in 2025. You can typically: Take $200,000 as Section 179 (assuming you have enough taxable income), zeroing the basis Or take a portion as Section 179 and the remainder as bonus depreciation Or take MACRS depreciation if Section 179 limits are not met Deduct interest paid during the year separately Your accountant chooses the combination that produces the best result for your specific tax position. Down payment treatment Your down payment is part of the equipment's basis. It is not a separate deduction. The full purchase price (down + financed amount) is what depreciates or qualifies for Section 179, not just what you paid out of pocket. What does NOT qualify The following are generally NOT deductible under Section 179: Equipment used 50% or less for business Real property (buildings, permanently affixed structures) Equipment held for inventory or resale Equipment acquired from related parties Operating-lease equipment (you do not own it) Loan vs lease tax comparison TreatmentLoan$1 Buyout LeaseFMV Lease Section 179 eligibleYesYes (treated as purchase)No Depreciation deductionYesYesNo Interest deductionYesYesN/A Full payment deductionNoNoYes Owns asset on balance sheetYesYesNo Year-end timing matters To claim Section 179 in tax year 2025, equipment must be placed in service by December 31, 2025. "Placed in service" means ready and available for use, not just ordered. If you finance equipment in late December, make sure delivery and setup are complete before year-end. For lenders, this often means deals signed by mid-December at the latest, with faster lenders accepting deals through the third week. Year-end purchase timing walks through the deadline chain. What documentation to keep Invoice or bill of sale showing purchase price and date Loan agreement with payment schedule Year-end statement showing interest paid Photos or service records showing in-service date Use log if equipment use crosses business/personal lines Talk to your accountant This guide is a starting point. Section 179 limits change, bonus depreciation phases shift, and state-level conformity varies. Your CPA can model your specific situation and pick the combination that minimizes tax across multiple years. When you are ready to finance, soft-pull prequalification takes three minutes and shows real rate ranges without affecting credit.