Section 179 lets a business deduct the full price of equipment in the year it is placed in service. Financing does not change that. The deduction follows the purchase, not the payments, so a machine you have paid two installments on by December 31 is deducted the same as one you paid cash for.
The example
A contractor buys a used $120,000 excavator in October 2026, finances the full amount over 60 months at an average-credit rate, and puts it to work the week it lands. By year end they have made two payments of about $2,724, a little over $5,448 out the door.
State income tax is on top of the federal number where the state follows the federal rule. Some states cap or disallow the deduction and make you add it back; the state pages list which ones.
Section 179 or bonus depreciation
For 2026 both routes get you to the same $120,000 deduction on this machine. They differ in the details.
- Section 179 is capped at $2,560,000 of equipment per year, phases out above $4,090,000 of purchases, and cannot exceed the business's taxable income for the year. Anything it cannot absorb carries forward.
- Bonus depreciation is 100 percent again for equipment acquired after January 19, 2025, has no dollar cap, and can create a loss. Used equipment qualifies as long as it is new to you.
- You can split. Take part of the machine under 179, the rest under bonus, or deduct part now and depreciate the rest over five years if a full write-off would waste it in a low-income year.
The deadline is delivery, not the contract
"Placed in service" means the machine is on site, running, and available for work. A signed finance agreement in December on a machine that ships in January is a 2027 deduction. Dealer lead time, transport, and a lender's funding timeline all sit between the signature and the deadline, so a December purchase needs the machine physically delivered before the 31st. October and November purchases are safe. The last two weeks of December are not.
Three ways people lose it
- The wrong lease. On a loan or a $1 buyout lease you own the machine for tax purposes and can deduct it. On a fair market value lease the lessor owns it and takes the depreciation; you deduct the payments as rent instead. Both are fine structures, but only one gives you the $120,000 in year one. The lease versus loan guide covers the tradeoff.
- Selling early. If the excavator is deducted to zero and sold in year three for $70,000, that $70,000 is ordinary income in the year of sale. The deduction is real, but it is a timing benefit on a machine you keep and a partial one on a machine you flip.
- Business use under 50 percent. Equipment has to be used more than half for business to take 179, and if use drops below that in a later year the deduction is recaptured. Rare on an excavator, common on a pickup.
Payment on the example machine
| Structure | Financed | Term | Strong credit | Average credit | Challenged or start-up |
|---|---|---|---|---|---|
| Excavator, 60 months | $120,000 | 60 mo | $2,485/mo | $2,724/mo | $3,041/mo |
| Excavator, 48 months | $120,000 | 48 mo | $2,981/mo | $3,213/mo | $3,519/mo |
| Excavator, 10% down, 60 months | $108,000 | 60 mo | $2,237/mo | $2,452/mo | $2,737/mo |
Illustrative estimates, not offers or quotes. Real payments depend on the funding program, credit, time in business, down payment, equipment age, and documentation fees. Run your own numbers in the payment calculator.
None of these change the deduction. The financed amount, the term, and the rate only change the cash flow. The full price is what gets deducted, on the day the machine goes to work.
Lenders make their own credit decisions and set their own terms. Nothing here is an offer of credit or tax advice.
Questions we get
Can I deduct equipment I have not paid off?
Yes. Section 179 and bonus depreciation apply in the year the equipment is placed in service, regardless of how it was paid for. A financed machine is deducted in full the year it is delivered and put to work.
Do I have to take the whole deduction in year one?
No. You can elect Section 179 on part of the cost and depreciate the rest over five years, or take bonus depreciation on the full amount. Taking less now makes sense in a low-income year where the full deduction would be wasted.
Does used equipment qualify?
Yes, for both Section 179 and bonus depreciation, as long as the equipment is new to your business and bought from an unrelated party.
What if I lease the machine instead?
On a $1 buyout lease you are the owner and can deduct it. On a fair market value lease the lessor takes the depreciation and you deduct the monthly payments as an operating expense. Check which one the paperwork says before you sign.
