Mike Patterson runs a successful excavation company in Ankeny, Iowa. Last fall, he needed a new compact excavator for residential foundation work—his existing 12-year-old machine was costing more in repairs than it was worth. The equipment dealer presented two options:

Option A: Purchase - $85,000 financed at 6.5% over 5 years

‍Option B: Lease - $1,650/month for 60 months with $1 buyout

Mike's generic accountant said, "Just buy it. Ownership is always better than leasing. You'll have an asset on your books."

Mike followed that advice. It cost him $43,200 in unnecessary taxes and lost opportunities over the next three years.

Here's what his accountant missed: Mike's company had unusually high profits that year ($520,000) putting him in the highest tax brackets. With proper tax planning, a strategic lease structure combined with Section 179 expensing on other equipment would have created dramatically better tax outcomes.

When Mike finally came to Performance Financial for equipment replacement planning two years later, we showed him exactly how much his previous decision had cost—and how to avoid making the same mistake again.

This story repeats constantly across Des Moines, West Des Moines, Johnston, Grimes, and throughout Central Iowa. Contractors make equipment financing decisions based on simplistic advice, generic rules-of-thumb, or dealer recommendations—completely ignoring the massive tax implications that determine the true cost.

What Your Generic Accountant Doesn't Understand About Equipment Financing

Here's what most small business accountants tell you about equipment: "Buy it if you can afford it. Leasing is just throwing money away. You want to own assets."

This one-size-fits-all advice ignores the entire tax code and demonstrates dangerous ignorance of construction equipment economics.

The reality: Whether buying or leasing is advantageous depends on your specific tax situation, cash flow position, equipment replacement cycle, and strategic growth plans. Sometimes buying is optimal. Sometimes leasing is dramatically superior. Generic advice fails contractors.

The Four Equipment Financing Structures

1. Cash Purchase

Outright purchase with business cash or savings:

• Tax Treatment: Section 179 expensing (up to $1.22M in 2025) or bonus depreciation (100% in 2025, phasing down) allows immediate full deduction
• Pros: No interest costs, full ownership immediately, simplest accounting
• Cons: Massive cash outlay, opportunity cost of deployed capital, all ownership risk

2. Installment Purchase (Equipment Loan)

Financed purchase with lender retaining security interest:

• Tax Treatment: Same Section 179/bonus depreciation as cash purchase despite financing
• Pros: Preserve working capital, predictable payments, build business credit
• Cons: Interest expense (4-8% typical rates), all ownership risk despite financing

3. Capital Lease (Finance Lease)

Structured as lease but treated as purchase for accounting/tax:

• Tax Treatment: Same Section 179/bonus depreciation as purchase, interest portion deductible
• Pros: Similar to financing but potentially better terms, may have upgrade options
• Cons: Complexity, ownership obligations despite lease structure

4. Operating Lease (True Lease)

Equipment rental with lessor retaining ownership:

• Tax Treatment: Monthly lease payments fully deductible as current expense
• Pros: No ownership risk, easier equipment upgrades, simpler cash flow management
• Cons: No equity building, ongoing payments without ownership, total cost typically higher

The strategic question: Which structure creates the best after-tax economics for YOUR specific situation?

The Tax Code Variables That Change Everything

Section 179 Expensing

Allows immediate deduction of equipment cost (up to $1.22M in 2025):

• Applies only to purchased equipment (not true leases)
• Limited to taxable income (can't create losses)
• Phases out dollar-for-dollar above $3.05M in annual equipment purchases
• Requires equipment placed in service during tax year

Example: $100,000 excavator purchased in November. With Section 179, immediate $100,000 deduction. In 37% effective tax bracket, creates $37,000 tax savings in purchase year.

Bonus Depreciation

Allows 100% first-year depreciation (2025):

• Applies to new and used equipment
• No income limitation (can create tax losses)
• No phase-out threshold
• Phases down: 80% in 2026, 60% in 2027, 40% in 2028, 20% in 2029, 0% after

Example: Same $100,000 excavator. Bonus depreciation creates same immediate $100,000 deduction as Section 179, but can be used even if business has tax loss.

Regular Depreciation

Traditional depreciation over IRS recovery period:

• Most construction equipment: 5-7 year recovery period
• Straight-line or accelerated methods available
• Spreads deduction across multiple years
• Used when Section 179/bonus depreciation not elected or not available

Example: $100,000 excavator depreciated over 7 years creates approximately $14,285 annual deduction (simplified straight-line). In 37% bracket, $5,285 annual tax savings.

The Cash Flow vs. Tax Timing Tradeoff

This is where generic advice catastrophically fails contractors. The optimal financing decision depends on the intersection of:

Current Year Tax Position

• High profit years benefit dramatically from immediate Section 179/bonus depreciation
• Low profit or loss years may benefit from spreading deductions via lease or regular depreciation
• Variable profit patterns require multi-year tax modeling

Future Year Projections

• Growing businesses may prefer spreading deductions to future higher-tax years
• Declining businesses may prefer immediate deductions
• Equipment replacement cycles impact optimal depreciation timing

Cash Flow Requirements

• Rapid growth consuming working capital favors lease preservation of cash
• Stable businesses with strong cash positions can afford purchase
• Seasonal contractors need flexibility matching payment timing to revenue

Equipment Replacement Strategy

• Frequent upgraders benefit from lease structures facilitating exchanges
• Long-term holders benefit from ownership equity
• Technology-dependent equipment may favor shorter lease cycles

Why Traditional "Rules" Fail Contractors

Generic accountants love simple rules. Here's why these common guidelines are dangerous:

Dangerous Rule #1: "Always Buy—You Want to Own Assets"

Problem: This ignores that equipment is a depreciating asset, not an appreciating investment. For rapidly depreciating equipment (trucks, technology-heavy equipment), ownership risk may exceed benefits. Additionally, in low-profit years, immediate deductions provide minimal value.

Example: Plumbing contractor with $80,000 profit buys $60,000 truck. Section 179 creates $60,000 deduction, but contractor only in 22% federal + 5% state brackets = $16,200 tax savings. Same contractor in high-profit year (37% federal + 5% state) would save $25,200—$9,000 difference based solely on timing.

Dangerous Rule #2: "Never Lease—It's Throwing Money Away"

Problem: Operating leases provide 100% deductible payments spread across useful life. For contractors with variable profits, consistent deductible expenses create better tax outcomes than lumpy depreciation deductions.

Example: HVAC contractor with volatile profits (ranging $150K-$450K annually). Leasing service vehicles at $800/month creates consistent $9,600 annual deduction. Purchasing creates large deduction in purchase year (potentially wasted if profits low), then nothing in subsequent years.

Dangerous Rule #3: "Maximize Section 179 Every Year"

Problem: Section 179 limited to taxable income means excess deduction is wasted. In low-profit years, taking Section 179 provides no benefit and eliminates depreciation deductions in profitable future years.

Example: Excavation contractor has $40,000 profit in Year 1, purchases $80,000 equipment. Section 179 limited to $40,000 (can't exceed income). If contractor elected regular depreciation instead, they'd preserve deductions for Years 2-7 when profits might be higher.

Dangerous Rule #4: "Always Finance—Preserve Your Cash"

Problem: Interest rates matter. At 8-10% equipment financing rates, interest cost may exceed tax benefit of deploying cash elsewhere.

Example: Contractor has $75,000 cash, needs $75,000 truck. Financing at 8% over 5 years costs $15,000 interest. If contractor's effective tax rate is 30%, after-tax interest cost is $10,500. If that cash would otherwise sit in 4% savings, financing makes sense. If that cash would generate 12% business returns, cash purchase is better.

The Performance Financial Equipment Decision Framework

At Performance Financial, we implement systematic equipment financing analysis for Iowa contractors. Here's our process:

Step 1: Multi-Year Tax Projection

Current Year Profit Analysis

• Projected net profit before equipment purchase
• Effective tax rate (federal + state + self-employment if applicable)
• Other tax deductions and credits available
• Section 179/bonus depreciation utilization capacity

3-Year Forward Projection

• Expected profit trajectory (growing, stable, declining)
• Planned equipment purchases in future years
• S-Corp salary and distribution strategies
• Retirement plan contribution plans

Tax Bracket Management

• Identify years where income approaches bracket thresholds
• Model impact of equipment deductions on bracket management
• Evaluate QBI deduction implications
• Consider alternative minimum tax (AMT) situations

Step 2: True Cost Comparison

Purchase Analysis

Equipment Cost: $100,000
Down Payment (20%): $20,000
Financed Amount: $80,000
Interest Rate: 6.5%
Term: 60 months

Monthly Payment: $1,567
Total Interest Paid: $14,020
Total Cash Outlay: $114,020

Tax Benefit (Year 1):
Section 179 Deduction: $100,000
Tax Rate: 37% (federal) + 5% (state) = 42%
Tax Savings: $42,000

Net After-Tax Cost: $72,020

Lease Analysis

Monthly Lease Payment: $1,800
Term: 60 months
Total Payments: $108,000
Buyout Option: $1

Annual Deduction: $21,600
Tax Rate: 42%
Annual Tax Savings: $9,072
Total Tax Savings (5 years): $45,360

Net After-Tax Cost: $62,641

Comparison:

• Purchase Net Cost: $72,020
• Lease Net Cost: $62,641
• Lease Advantage: $9,379 (in this scenario)

Critical caveat: This advantage assumes consistent 42% tax rate all years. If tax rate varies significantly year-to-year, conclusion could reverse.

Step 3: Cash Flow Impact Modeling

Working Capital Analysis

Purchase scenario:

• Immediate $20,000 cash reduction (down payment)
• Locked capital unavailable for other opportunities
• Monthly payment $1,567 (after-tax cost $907 at 42% rate due to interest deduction)

Lease scenario:

• Zero cash reduction (typically)
• Full $20,000 available for business operations
• Monthly payment $1,800 (after-tax cost $1,044 at 42% rate)
• Net cash flow difference: $137/month disadvantage, offset by $20,000 preservation

13-Week Cash Flow Projection

We integrate equipment payments into comprehensive cash flow forecasting:

• Equipment payment timing vs. project revenue timing
• Seasonal fluctuation accommodation
• Maintenance and repair cost projections
• Replacement cycle planning

Step 4: Strategic Equipment Planning

5-Year Equipment Roadmap

We develop comprehensive plans:

• All major equipment replacement schedules
• Technology upgrade cycles
• Capacity expansion equipment needs
• Coordinated tax planning across multiple purchases

Tax Year Optimization

Strategic timing creates enormous value:

• Equipment purchased December 31 qualifies for full-year deduction
• Equipment purchased January 1 delays deduction one year
• Coordinating purchases with high-income years maximizes benefit
• Spreading purchases across multiple years prevents wasted deductions

Example: Contractor needs three trucks over next 18 months. Option A: Buy all three in Year 1 creating $180,000 deduction. Option B: Buy one in Year 1 ($60K deduction), two in Year 2 ($120K deduction). If Year 1 profit is $200K but Year 2 profit is $350K, Option B creates $21,000 additional tax savings (28% effective rate difference × $60K shifted deduction).

Step 5: Buy vs. Lease Decision Matrix

We score equipment financing options across multiple dimensions:

Tax Efficiency Score

• Net present value of all tax deductions
• Timing of tax benefits relative to need
• Risk of wasted deductions
• Integration with other tax strategies

Cash Flow Score

• Working capital preservation
• Payment timing vs. revenue patterns
• Flexibility for business volatility
• Emergency cash access maintenance

Operational Flexibility Score

• Equipment upgrade capability
• Obsolescence risk management
• Maintenance and repair responsibility
• End-of-term options

Total Cost Score

• After-tax net present value
• Opportunity cost of deployed capital
• Risk-adjusted expected returns

Weighted score considering contractor's priorities (some prioritize tax savings, others prioritize flexibility) determines optimal structure.

Real-World Examples: Buy vs. Lease for Different Contractor Profiles

Example #1: High-Profit Excavation Contractor (Ankeny)

Profile:

• $680,000 annual net profit
• Needs $140,000 track excavator
• 42% effective tax rate
• Strong cash position ($220,000)
• 8-10 year equipment replacement cycle

Analysis:

• Purchase with Section 179: Immediate $58,800 tax savings (42% × $140K)
• True lease: $2,400/month = $28,800/year expense × 42% = $12,096 annual tax savings
• After 5 years: Purchase saves $6,900 in present value terms

Recommendation: Purchase. High current tax rate maximizes immediate Section 179 benefit. Long replacement cycle means ownership risk acceptable. Strong cash position supports purchase without working capital constraints.

Example #2: Growing HVAC Contractor (West Des Moines)

Profile:

• $240,000 current profit, projected $380,000 next year, $520,000 in 2 years
• Needs three service vans ($105,000 total)
• Currently 32% tax rate, projected 37-42% within 2 years
• Tight cash flow due to rapid growth
• 4-5 year vehicle replacement cycle

Analysis:

• Purchase now: 32% tax rate creates $33,600 current savings
• True lease: Spreads deductions across 5 years, average 37% rate creates $38,850 total savings
• Lease preserves $21,000 working capital (20% down × 3 vehicles)

Recommendation: Lease. Rising tax rates mean future deductions more valuable than current. Rapid growth requires working capital preservation. Short replacement cycle makes lease flexibility valuable.

Example #3: Established Plumbing Contractor (Johnston)

Profile:

• $420,000 annual profit (stable)
• Needs $45,000 equipment package (trencher, locator, camera)
• 37% tax rate
• Moderate cash position
• Technology-dependent equipment requiring frequent updates

Analysis:

• Purchase: $16,650 immediate tax savings (37% × $45K)
• 3-year lease with upgrade option: $1,400/month = $6,228 annual tax savings
• Equipment may be obsolete in 4-5 years (technology changes)

Recommendation: Lease with upgrade option. Technology risk high—owning obsolete equipment creates losses. Lease upgrade provisions allow frequent technology refresh without disposal losses. Tax differential minimal given stable rates.

Example #4: Seasonal Landscaping Contractor (Grimes)

Profile:

• $190,000 annual profit (highly seasonal)
• Needs $75,000 equipment (mowers, aerators)
• 27% effective tax rate (lower due to seasonality timing)
• Cash flow very tight November-March
• Peak season April-October

Analysis:

• Purchase: $20,250 tax savings (27% × $75K) but requires financing with winter payments
• Seasonal lease: $1,600/month April-October only (7 months) = $11,200 annual cost = $3,024 annual tax savings
• Seasonal structure perfectly matches cash flow

Recommendation: Seasonal operating lease. Perfect alignment with revenue pattern eliminates winter cash flow strain. Lower tax rate reduces purchase benefit. Operating lease maintains equipment flexibility for specialized seasonal equipment.

The Equipment Decision Red Flags

These situations indicate your equipment financing strategy needs immediate review:

Red Flag #1: Taking Section 179 in Low-Profit Years

If your profit is under $150,000 and you're taking maximum Section 179 deductions, you're likely wasting valuable deductions that would provide greater benefit in future higher-profit years.

Red Flag #2: Financing Equipment You'll Replace in 3-4 Years

If you're taking 5-7 year loans on equipment you'll replace in 3-4 years, you're paying interest on equipment you no longer own—creating terrible economics.

Red Flag #3: Paying Cash for Equipment During Growth Phases

If you're growing rapidly and deploying cash to equipment purchases, you're constraining your most scarce resource—working capital for growth.

Red Flag #4: Making Equipment Decisions in December

If you're scrambling to "buy something for the write-off" in late December, you're making reactive tax decisions rather than strategic equipment planning.

Red Flag #5: Never Analyzing Total Cost

If you're choosing financing based solely on monthly payment, ignoring tax implications and total cost, you're making decisions blind.

Take the Next Step: Get Your Equipment Financing Analysis

If you're a Des Moines-area contractor planning equipment purchases in the next 12 months, you owe it to yourself to understand the true costs of different financing structures.

Mike Patterson's story doesn't have to be your story. With proper construction-specialized tax planning, you can make equipment decisions that minimize taxes, optimize cash flow, and support business growth.

Book your free Tax & Accounting Analysis today and get comprehensive equipment financing guidance customized for your specific situation.

📞 Call: 515-949-0123
📧 Email: dvanthul@performancefinancialllc.com

Equipment Financing FAQs

Q: Is it better to lease or buy construction equipment?

A: It depends entirely on your tax situation, cash flow, and equipment replacement cycle. High-profit contractors often benefit from purchase with Section 179. Growing contractors with tight cash flow often benefit from leasing. There's no universal answer—proper analysis is essential.

Q: Can I still deduct equipment if I finance the purchase?

A: Yes! Section 179 and bonus depreciation apply to financed purchases just as they do to cash purchases. You get the full deduction immediately despite financing.

Q: Does leasing mean I'm "throwing money away"?

A: No. Leasing provides 100% deductible payments, preserves working capital, and eliminates ownership risk. For many contractors, the after-tax economics of leasing are superior to purchasing.

Q: Should I always max out Section 179?

A: No! Section 179 is limited to taxable income. In low-profit years, taking Section 179 wastes deductions that would provide greater value in future profitable years.

Q: When should I buy equipment instead of leasing?

A: Generally when you have: (1) High current-year profits, (2) Strong cash position, (3) Long equipment replacement cycles, (4) Low obsolescence risk, (5) Stable future profit expectations.

Q: How do I determine if bonus depreciation or Section 179 is better?

A: Bonus depreciation can create tax losses (used in loss years); Section 179 limited to income. If you have large losses or anticipate them, bonus depreciation may be better. Most contractors use Section 179 first.

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