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Tax strategy · IRC §§ 179(d)(5), 469, 465

Equipment rental and leasing: the deduction depends on how the lease is built.

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.

Forms & standards
IRC § 179(d)(5)IRC § 168(k)IRC § 469Treas. Reg. § 1.469-2(f)(6)Treas. Reg. § 1.469-1T(e)(3)IRC § 465

Serving United States, Virginia, Washington, DC, Maryland.

What we handle

The rules that decide the outcome

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.

Speak with an advisor
  • Ownership structureChoosing between leasing from a separate entity or owning equipment in the operating company.
  • Section 179 and bonusTesting the noncorporate lessor limits and using bonus depreciation where section 179 is barred.
  • Lease termsDrafting rent, term and maintenance responsibilities that support the intended treatment.
  • Passive and self-rental planningGrouping elections and avoiding income that is nonpassive while losses are trapped.
  • At-risk analysisReviewing recourse and nonrecourse debt in leasing programs.
  • True lease or financingDetermining whether the lessor or lessee is the tax owner entitled to depreciation.
  • Sales, use and property taxesVirginia business personal property tax, sales and use tax on rentals and local license taxes.
  • Investment program reviewDiligence on equipment leasing investments marketed for tax benefits.

Where we help

What the courts have said

1978

Frank Lyon Co. v. United States, 435 U.S. 561

The Supreme Court respected a sale-leaseback with real economic substance, letting the buyer-lessor claim depreciation. Form follows substance, not labels.

2000

Krukowski v. Commissioner, 114 T.C. 366, aff'd (7th Cir. 2002)

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.

2021

Olsen v. Commissioner, T.C. Memo. 2021-41

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.

Lesson

Substance and records

Leases need business terms, market rent and real ownership risk to hold up.

Our approach

How the engagement runs.

Review

Equipment, entities, debt and how each item is used.

Structure

Ownership, lease terms and elections.

Depreciate

Section 179, bonus and state schedules.

Defend

Documentation for an IRS or state review.

Questions

Frequently asked

If your question isn't here, call (703) 880-8412 and you'll reach a person.

Can I take section 179 on equipment my LLC leases to my company?

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.

Is equipment rental income passive?

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.

Why is my self-rental income nonpassive but my other rental losses passive?

That is the effect of Treas. Reg. section 1.469-2(f)(6). Courts have upheld it, including in Krukowski.

Are equipment leasing investments a good tax shelter?

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.

Does Virginia tax leased equipment?

Virginia localities levy business tangible personal property tax, rentals may carry sales and use tax, and Virginia does not follow federal bonus depreciation.

How do I know if a lease is really a financing?

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

IRS & federal tax

All IRS & federal tax updates
Nov 5, 2026IRS & federal tax

IRS releases 2027 inflation adjustments (Rev. Proc. 2026-35)

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)

Our guidance

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