Equipment Rental
Generate active business losses through equipment rental operations.
Overview
Equipment rental businesses allow taxpayers to purchase depreciable equipment, claim Section 179 expensing and bonus depreciation, and generate active business losses that offset W-2 or business income.
Equipment is purchased and rented to operating businesses or third parties. Rental income and depreciation deductions flow through to owner's tax return.
Requirements
Legitimate Business Operations
Must operate as genuine business with profit motive. Equipment rented to third parties or related operating businesses at fair market rates.
Material Participation
Owner must materially participate in equipment rental business (typically 500+ hours annually) to generate active losses.
Equipment Investment
Purchase qualifying equipment eligible for Section 179 expensing and bonus depreciation. Typical investment: $100K-$300K.
Tax Benefits
Example: $300K equipment purchase generates immediate deduction through Section 179 expensing and bonus depreciation, creating $104K tax savings at 35% effective rate.
Active business losses offset W-2 wages, business income, or capital gains in year of purchase and subsequent years.
Rental income in future years may be offset by ongoing expenses and remaining depreciation.
Implementation
Entity Formation
Establish LLC or S-Corporation for equipment rental operations. Obtain EIN, business bank account, and necessary licenses.
Equipment Acquisition
Purchase qualifying equipment before year-end. Equipment must be placed in service during tax year to claim current-year deductions.
Documentation
Maintain rental agreements, equipment schedules, time logs for material participation, and business expense records. Coordinate with CPA for proper tax reporting.
Important Considerations
Equipment rental must operate as legitimate business with profit motive. Sham transactions or arrangements lacking substance may be disallowed upon audit.
Material participation requires detailed time tracking and documentation. Failure to meet material participation standards converts losses to passive, limiting deductibility.
Section 179 and bonus depreciation provisions subject to annual limits and phase-outs. Consult with your CPA to determine current-year eligibility and optimal depreciation strategy.
Discuss Implementation
Contact us to evaluate equipment rental strategy for your situation.