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Tax strategy · IRC §§ 179(d)(5), 469, 465
Owners often buy equipment personally or in a separate company and lease it to their operating business, or invest in equipment leasing programs. Whether the depreciation is usable depends on section 179 lessor limits, the passive activity rules, at-risk rules and whether the deal is a true lease.
Serving United States, Virginia, Washington, DC, Maryland.
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Section 179 now allows up to $2.5 million of expensing, phased out above $4 million of purchases, but a noncorporate lessor (an individual, partnership or S corporation) can claim it on leased property only if it manufactured the property or the lease term is less than half the property's class life and the lessor's own business expenses exceed 15% of the rental income in the first 12 months. Corporate lessors are not subject to that limit, and 100% bonus depreciation under section 168(k) has no lessor restriction.
Equipment rental is usually a rental activity, so losses are passive unless an exception in Treas. Reg. section 1.469-1T(e)(3) applies, such as average rentals of seven days or less. When you rent property to a business in which you materially participate, the self-rental rule in Treas. Reg. section 1.469-2(f)(6) treats net rental income as nonpassive while losses stay passive. The at-risk rules in section 465 also limit losses funded by nonrecourse debt.
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The Supreme Court respected a sale-leaseback with real economic substance, letting the buyer-lessor claim depreciation. Form follows substance, not labels.
An owner who rented a building to his own professional corporation could not use the rental income to absorb passive losses; the self-rental rule was upheld.
Investors in a solar lens leasing program were denied depreciation and energy credits because they were not in a real business, and the court added that losses would have been passive anyway.
Leases need business terms, market rent and real ownership risk to hold up.
Our approach
Equipment, entities, debt and how each item is used.
Ownership, lease terms and elections.
Section 179, bonus and state schedules.
Documentation for an IRS or state review.
Questions
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Only if the noncorporate lessor tests are met: the lease term is under half the class life and your own business expenses on the property exceed 15% of rental income in the first 12 months. Otherwise use bonus depreciation, which has no lessor limit.
Usually yes. Exceptions include rentals averaging seven days or less, and the self-rental rule makes net income from leasing to your own active business nonpassive.
That is the effect of Treas. Reg. section 1.469-2(f)(6). Courts have upheld it, including in Krukowski.
Many are not. The IRS and the Tax Court have denied depreciation and credits where investors were not engaged in a real business, as in Olsen.
Virginia localities levy business tangible personal property tax, rentals may carry sales and use tax, and Virginia does not follow federal bonus depreciation.
Look at who bears the risks and rewards of ownership: bargain purchase options, terms covering most of the useful life and nominal residual value point toward a financing.
Latest updates
Authorized representatives can now make balance-due, amended return, extension, proposed assessment and federal tax deposit payments for business clients online. Appropriate authorization for the client and tax matter is required.
Source: IRS (IR-2026-134)
For 2027 the joint-return standard deduction rises to $33,200, the estate tax basic exclusion to $15,480,000, the annual gift exclusion to $20,000 and the Section 179 expensing limit to $2,640,000. Our advisors recommend revisiting year-end gifting and equipment purchase plans with these figures in mind.
Source: IRS (IR-2026-133)
All 6,576 nominated census tracts, including 2,594 rural tracts eligible for enhanced benefits, become Opportunity Zones on January 1, 2027 for ten years. Investors with capital gains should review the new map before committing funds.
Source: IRS (IR-2026-132)
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