What Contractors Should Know About Equipment Depreciation and Tax Deductions

Equipment Isn’t Just an Expense—It’s a Tax Advantage

Buying or financing heavy equipment is a major investment. But it’s also a powerful tax opportunity. When used correctly, equipment depreciation and Section 179 deductions can significantly reduce your taxable income—freeing up cash for reinvestment, payroll, or expansion.

Unfortunately, many small construction business owners don’t fully understand how these tools work—or how to use them strategically.

This guide breaks down the basics of construction equipment depreciation, key tax deductions, and how to maximize your savings when you buy or finance machinery.

What Is Equipment Depreciation?

Depreciation is the process of deducting the cost of a physical asset (like a backhoe or dump truck) over its useful life. The IRS assumes that over time, equipment loses value due to wear and tear.

If you don’t take a full deduction in year one (via Section 179), you’ll likely use MACRS depreciation (Modified Accelerated Cost Recovery System) to spread deductions across 5–7 years.

Example:
A $90,000 excavator purchased in 2025 might depreciate as follows:

• Year 1: $18,000
  
  
• Year 2: $28,800
  
  
• Year 3: $17,280
  
  
• … and so on, until the full amount is deducted
  
  

You can find full depreciation tables at IRS Publication 946.

What Is Section 179?

Section 179 allows you to deduct the full purchase price of qualifying equipment in the year it’s placed into service—instead of depreciating it over time.

For 2025, the Section 179 deduction limit is expected to be around $1.22 million (subject to IRS updates).

Qualifying equipment includes:

• New and used machinery
  
  
• Construction vehicles
  
  
• Attachments and accessories
  
  
• Software and office equipment
  
  

The equipment must be:

• Tangible
  
  
• Used for business more than 50% of the time
  
  
• Placed into service during the same tax year
  
  

Key benefit: You can take the full deduction even if you finance or lease the equipment, as long as it’s in use by year-end.

Learn more at Section179.org.

Bonus Depreciation: Another Tool in Your Toolbox

Bonus depreciation is a temporary incentive that allows businesses to deduct a large percentage of qualified equipment costs upfront—on top of Section 179, or when Section 179 limits are exceeded.

• In 2025, bonus depreciation is scheduled at 60%
  
  
• Applies to new and used equipment
  
  
• Useful for larger purchases or year-end expansions
  
  

Bonus depreciation phases down each year and is currently scheduled to sunset in future tax cycles unless extended by Congress.

Buy vs. Lease: Tax Differences

When you buy (with cash or financing):

• You may claim Section 179 and/or bonus depreciation
  
  
• You own the equipment and claim depreciation on your tax return
  
  
• You can deduct interest on the loan (in most cases)
  
  

When you lease:

• You may deduct monthly lease payments as operating expenses
  
  
• You don’t own the equipment during the lease term
  
  
• Some leases offer end-of-term buyout options ($1 or FMV)
  
  

Always check how your lease is classified—capital leases (aka finance leases) are often eligible for depreciation deductions, while operating leases are typically expensed monthly.

How to Maximize Your Equipment-Related Tax Savings

1. Time your purchases
   Make sure equipment is delivered and in service by December 31 to qualify for Section 179 in that tax year.
   
   
2. Keep good records
   Track purchase agreements, payment schedules, delivery dates, and usage logs.
   
   
3. Use financing strategically
   You can claim deductions on the full cost even if you haven’t fully paid off the machine.
   
   
4. Work with a tax advisor
   Tax law is complex and changes frequently. A construction-savvy CPA can help you navigate deductions and ensure compliance.
   
   
5. Bundle eligible equipment
   If you’re outfitting a new crew, you can often finance and deduct equipment, attachments, trailers, and tools under the same deduction.
   
   

Common Mistakes to Avoid

• Missing the in-service deadline: If the machine isn’t working on a job site by year-end, you can’t take the deduction.
  
  
• Claiming depreciation on personal-use assets: If a machine is used for both personal and business purposes, you must prorate the deduction.
  
  
• Overlooking trade-ins: The cost basis for depreciation is adjusted when you trade in an old machine.
  
  
• Assuming leases always qualify for Section 179: Only specific lease types qualify—check the agreement terms.
  
  

Final Thoughts: Use Equipment to Lower Your Tax Bill

The right equipment doesn’t just help you move dirt—it can help you move your financials into better territory. Whether you finance a new loader or lease a skid steer with intent to buy, there are real tax advantages to doing it the right way.

Need help planning a purchase or understanding how it impacts your financing and taxes? Contact National Legacy Capital Group. Their team works with construction businesses to structure tax-friendly financing solutions—so you can invest wisely and keep more of your hard-earned money.

Frequently Asked Questions (FAQ)

Can I use Section 179 if I finance the equipment?
Yes. You can deduct the full purchase price as long as the equipment is placed in service that year—even if you’re still making payments.

Is bonus depreciation the same as Section 179?
No. They’re separate provisions. Bonus depreciation has no annual limit and can apply after Section 179 is maxed out.

What happens if I use the equipment for personal projects?
You’ll need to reduce your deduction based on personal-use percentage. Only business use is deductible.

Can I deduct repairs or upgrades too?
Yes. Routine maintenance is deductible. Some upgrades may need to be capitalized and depreciated—check with your CPA.