Is equipment financed in 2024 still eligible for depreciation?

by | Jul 3, 2025 | AI Tax Answer Library, Depreciation & Capital Expenses

Here’s what HIVE AI had to say about “Is equipment financed in 2024 still eligible for depreciation?”:

Yes, equipment financed in 2024 is still eligible for depreciation, including bonus depreciation and Section 179 expensing. The method of financing does not affect the depreciation eligibility of business equipment, as long as the equipment meets the fundamental requirements for depreciation.

Fundamental Requirements for Depreciation

Equipment financed in 2024 must meet the basic depreciation requirements regardless of how it was acquired. You may depreciate property that meets all the following requirements: 1. It must be property you own. 2. It must be used in a business or income-producing activity. 3. It must have a determinable useful life. 4. It must be expected to last more than one year. 5. It must not be excepted property. IRS.gov Tax Topics IRS.gov Tax Topics IRS.gov Tax Topics IRS.gov Tax Topics IRS.gov Tax Topics The key factor is ownership and business use, not the method of payment or financing arrangement.

A taxpayer can claim depreciation deductions only for property it owns, and can start depreciating property only when it first places the property into service in its trade or business. Dawson U.S. Tax Court Opinions: Jacob Berger & Evelyn R. Berger Dawson U.S. Tax Court Opinions: Jacob Berger & Evelyn R. Berger When you finance equipment, you typically obtain legal ownership of the property even though you’re making payments over time, which satisfies the ownership requirement for depreciation purposes.

Financed Equipment as Purchased Property

For tax purposes, financed equipment is generally treated as purchased property rather than leased property. On January 1, 2024, Y enters into an agreement to obtain the right to use equipment in its trade or business for seven years. At the end of the agreement, Y will take ownership of the equipment at no additional cost. For regular tax purposes, Y treats the agreement as a financed purchase of equipment and capitalizes the cost of the equipment of $57,750x (equal to the present value of the annual payments based on a 5% rate stated in the agreement) and depreciates the equipment under the general depreciation system using the 200 percent declining balance method, the half-year convention, and a 5-year recovery period.

This example demonstrates that even when equipment is acquired through financing arrangements, it’s treated as a purchase for depreciation purposes when the taxpayer will ultimately own the equipment. The depreciation basis is typically the present value of the total payments, and depreciation begins when the equipment is placed in service.

Bonus Depreciation for Financed Equipment

Financed equipment placed in service in 2024 qualifies for the current bonus depreciation rates. Certain qualified property (defined below) acquired after September 27, 2017, and placed in service after December 31, 2023, and before January 1, 2025 (other than property with a long production period and certain aircraft), is limited to a special depreciation allowance of 60% of the depreciable basis of the property. IRS – Instruction 4562: Instructions for Form 4562, Depreciation and Amortization (Including Information on Listed Property)

Qualified property is: • Tangible property depreciated under MACRS with a recovery period of 20 years or less; • Computer software defined in and depreciated under section 167(f)(1); • Water utility property (see 25-year property, later); and • Qualified film, television, and live theatrical productions, as defined in sections 181(d) and (e). IRS – Instruction 4562: Instructions for Form 4562, Depreciation and Amortization (Including Information on Listed Property) Most business equipment falls into these categories and would qualify for 60% bonus depreciation in 2024.

Section 179 Expensing for Financed Equipment

Financed equipment can also qualify for Section 179 expensing, which allows immediate deduction of the full cost rather than depreciation over time. You can also elect under section 179 to expense a portion of the cost of certain property you bought in 2024 for use in your farming business. The section 179 election is made on Form 4562. IRS – Instruction 1040 (Schedule F): Instructions for Schedule F (Form 1040), Profit or Loss From Farming The reference to “bought” property includes financed purchases, as the taxpayer has acquired ownership rights in the property.

However, proper election procedures must be followed. The election must also be made on the taxpayer’s first income tax return for the taxable year or a timely filed amended return. The record does not indicate that petitioners made an election under section 179(a) for either 2013 or 2014 to accelerate the depreciation of the equipment. Indeed, the record lacks any documentation specifying each item of section 179 property to which the election applies. Accordingly, petitioners are not entitled to deduct the equipment costs under section 179 as an expense for either 2013 or 2014 but, rather, must depreciate them under section 167, provided that they can show their entitlement to such depreciation deductions. Dawson U.S. Tax Court Opinions: Jacob Berger & Evelyn R. Berger Dawson U.S. Tax Court Opinions: Jacob Berger & Evelyn R. Berger

Depreciable Basis for Financed Equipment

The depreciable basis for financed equipment is typically the total cost of the equipment, which may include the present value of all payments to be made. For regular tax purposes, Y treats the agreement as a financed purchase of equipment and capitalizes the cost of the equipment of $57,750x (equal to the present value of the annual payments based on a 5% rate stated in the agreement) and depreciates the equipment under the general depreciation system using the 200 percent declining balance method, the half-year convention, and a 5-year recovery period. For regular tax purposes, Y claims $11,550x ($57,750x cost x 20%) of deductible tax depreciation in 2024 and $18,480x ($57,750x cost x 32%) of deductible tax depreciation in 2025.

This approach ensures that the taxpayer can depreciate the full economic cost of the equipment, even though payments are spread over multiple years. The interest component of the financing payments is typically deductible separately as interest expense rather than being included in the depreciable basis.

Documentation and Substantiation Requirements

Regardless of the financing method, proper documentation is essential for claiming depreciation deductions on financed equipment. To prove entitlement to a depreciation deduction, a taxpayer must also establish the property’s depreciable basis by substantiating its cost, recovery period, and any previous allowable depreciation. Dawson U.S. Tax Court Opinions: Jacob Berger & Evelyn R. Berger For financed equipment, this includes maintaining records of the financing agreement, payment schedule, and evidence that the equipment is used in the business.

Griffin claimed depreciation/section 179 expenses for a wide range of items for which she provided a summary and backup documentation. Her backup documentation included copies of receipts and invoices–reduced to four per page–that were often too small or too light to decipher. For those purchases she did not provide sufficient proof of the amounts expended, the time and place of acquisition, or the business purpose. Griffin is thus not entitled to the depreciation/section 179 expenses claimed. Dawson U.S. Tax Court Opinions: Sharon Louise Griffin Dawson U.S. Tax Court Opinions: Sharon Louise Griffin This case emphasizes the importance of maintaining clear, legible documentation for all equipment purchases, whether financed or paid in cash.

Timing of Depreciation for Financed Equipment

Depreciation begins when the financed equipment is placed in service, not when the final payment is made. The period for depreciation of an asset shall begin when the asset is placed in service. Dawson U.S. Tax Court Opinions: Preston Olsen & Elizabeth Olsen This means that even if you’re still making payments on financed equipment, you can begin claiming depreciation deductions as soon as the equipment is operational in your business.

The placed-in-service date is crucial for determining which year’s depreciation rules apply, including bonus depreciation percentages and Section 179 limits. Equipment financed and placed in service in 2024 would be subject to 2024 rules, regardless of when the financing payments are completed.

Interaction with Interest Deductions

When equipment is financed, the interest portion of the payments is generally deductible as a separate business expense under Section 162, while the principal portion contributes to the depreciable basis of the equipment. For regular tax purposes, Y also incurs interest expense on the remaining liability as of the end of the year equal to $2,900x for 2024 and $2,550x for 2025, based on the 5% interest rate stated in the agreement. This separation ensures that both the cost of the equipment and the cost of financing are properly deductible, though through different mechanisms.

Special Considerations for Different Types of Equipment

The type of equipment being financed may affect the specific depreciation rules that apply. The kinds of property that you can depreciate include machinery, equipment, buildings, vehicles, and furniture. IRS.gov Tax Topics Each category may have different recovery periods under MACRS, and some types of equipment may be subject to special limitations or enhanced benefits.

For example, vehicles may be subject to luxury car limitations, while certain types of manufacturing equipment might qualify for accelerated depreciation schedules. The financing method doesn’t change these underlying classifications, but it’s important to apply the correct rules based on the type of equipment acquired.

Planning Considerations

Financing equipment in 2024 can provide significant tax advantages when combined with bonus depreciation or Section 179 expensing. The ability to claim immediate tax deductions for 60% (bonus depreciation) or potentially 100% (Section 179) of the equipment cost, while spreading the cash payments over time, can create favorable cash flow situations for businesses.

However, businesses should consider the interaction between depreciation benefits and financing terms. While the tax benefits are immediate, the financing costs continue over the life of the loan. The overall economic benefit depends on factors such as interest rates, tax rates, and the business’s cash flow needs.

The phase-down of bonus depreciation in future years also creates an incentive to acquire and place equipment in service sooner rather than later, as the immediate tax benefits will be reduced in subsequent years. Equipment placed in service in 2025 will only qualify for 40% bonus depreciation, compared to 60% for equipment placed in service in 2024.

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