Question 1

What's the difference between a loan, capital lease, and operating lease?

Accepted Answer

A loan finances the purchase: you own the equipment from day one, the lender holds a lien, and on payoff the lien releases. A capital lease ($1 buyout) is economically a loan — you pay full price plus interest over the term, then exercise a $1 purchase option to take title. Many lenders structure capital leases for tax reasons; the lessee depreciates the asset, claims §179 / bonus depreciation, and treats it as ownership for both tax and (post-ASC 842) book purposes. An operating lease is genuine rental: you pay down to a residual value over the term, then choose between buying at residual, returning, or releasing. Lower monthly payment, no equity built, and the lessor — not you — claims the equipment's depreciation.

Question 2

What is Section 179 and how does it affect equipment financing?

Accepted Answer

IRC §179 lets a business immediately deduct the full cost of qualifying equipment placed in service during the tax year, instead of depreciating it over multiple years. For 2026 the deduction limit is $1,160,000 and the phase-out begins at $2,890,000 of qualifying purchases — every dollar over that threshold reduces the deduction dollar-for-dollar. If a business places more than $4.05M of qualifying equipment in service in a single year, the §179 deduction phases out completely. The deduction also can't create a net operating loss; it's capped at taxable business income. Section 179 applies to purchased equipment (and capital leases), not to operating leases — on an operating lease, the lessor takes the deduction. Source: IRS Publication 946 + Rev. Proc. inflation adjustments.

Question 3

What is bonus depreciation and how does it interact with §179?

Accepted Answer

Bonus depreciation under IRC §168(k) lets a business deduct an additional percentage of equipment cost in year 1, on top of any §179 deduction. The Tax Cuts and Jobs Act of 2017 set bonus at 100%, and it has been phasing down since 2023: 80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026, and 0% from 2027 onward (absent further legislation). The standard order of operations: take §179 first (up to the per-year cap and within taxable-income limits), then bonus depreciation on whatever basis remains, then standard MACRS depreciation on the leftover. For 2026, the 20% bonus rate is small enough that for most under-cap businesses §179 alone does most of the work; bonus only matters once you exceed the $1.16M §179 cap.

Question 4

Should I lease or buy equipment?

Accepted Answer

It depends on cash flow, total cost of ownership, and how fast the equipment depreciates economically. Lease when monthly payment minimization matters more than total cost (preserving cash for higher-return uses), when the equipment is rapidly evolving tech that you'll want to swap out (computers, light vehicles in heavy use), or when the manufacturer offers a subsidized lease rate materially below market loan rates. Buy when the equipment has a long useful life beyond the financing term, when residual value is high (heavy machinery, real-asset-backed equipment), or when Section 179 + bonus depreciation produces year-1 tax savings large enough to flip the after-tax economics. Run the numbers both ways at your real marginal tax rate before deciding — the right answer is rarely the one that matches the salesperson's pitch.

Question 5

Is sales tax due on equipment purchases?

Accepted Answer

Most states tax business equipment as tangible personal property (TPP), with rates ranging from 0% (Delaware, Montana, New Hampshire, Oregon — no general sales tax) to over 9% combined state-and-local in places like Tennessee, Louisiana, and Alabama. A handful of states have manufacturing-equipment exemptions or partial exemptions that reduce the effective rate for qualifying assets — Illinois, Texas, and Pennsylvania have notable manufacturing exemptions. On a lease, sales tax is typically charged on each monthly payment rather than upfront on the equipment value, which can spread the cash impact even if the total tax paid ends up similar. Confirm the rule with your state Department of Revenue or your CPA before assuming an exemption applies.

Question 6

How does equipment financing compare to an SBA 504 loan?

Accepted Answer

SBA 504 is a real-estate-and-heavy-equipment program for projects ≥ $500,000 (typically) with a 50/40/10 split: 50% from a conventional lender, 40% from a Certified Development Company at a long-term fixed rate (currently in the high-5%s to mid-6%s, well below most equipment-finance rates), and 10% borrower equity. The 504 rate is significantly cheaper than typical equipment-dealer financing, especially for capital-intensive equipment, but the program is slower to close (60–120 days vs 5–15 for an equipment loan), has more paperwork, and the equipment has to qualify as long-life fixed assets — light office equipment doesn't qualify. For one-off equipment under $250K, dealer or bank equipment financing is faster and the rate premium is usually worth the speed; for $500K+ machinery purchases, 504 is almost always worth the wait.

Question 7

What's MACRS depreciation?

Accepted Answer

MACRS — Modified Accelerated Cost Recovery System — is the IRS's standard depreciation method, in effect since 1986. It assigns asset classes a recovery period (3, 5, 7, 10, 15, 20, 27.5, or 39 years) and a depreciation method (200% declining balance switching to straight-line for most equipment). Most business equipment falls in the 5-year class: vehicles, computers, office machinery, manufacturing tools. Office furniture and fixtures are 7-year. Real estate is 27.5 years (residential) or 39 years (commercial). The half-year convention assumes you placed the asset in service mid-year, so the 5-year class actually spreads over 6 tax years: 20%, 32%, 19.2%, 11.52%, 11.52%, 5.76%. See IRS Publication 946 Appendix A for the full tables.

Question 8

What if I trade in old equipment?

Accepted Answer

Pre-2018, trade-ins between like-kind business assets qualified for §1031 like-kind-exchange tax deferral — you didn't recognize gain on the old equipment, and your basis carried over to the new equipment. The Tax Cuts and Jobs Act of 2017 limited §1031 to real property only effective 2018, so equipment trade-ins are now treated as taxable exchanges: you recognize gain or loss on the old equipment based on its trade-in credit minus adjusted basis, and the new equipment's basis is its full purchase price (not the old basis carried over). For this calculator, just net the trade-in credit against the equipment cost when you input it — the tax math on the gain/loss from the old asset is a separate computation you'll do on your return.

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