Can I finance and lease equipment through my LLC to offset W2 income with Section 179 deduction?

This strategy is commonly known as a "passive leasing arrangement" and yes, it can be legitimate if structured correctly. Section 179 allows businesses to deduct the full purchase price of qualifying equipment in the year it's placed in service rather than depreciating it over time. A few important things to understand: The equipment must be used for business purposes more than 50% of the time. If personal use exceeds business use, the deduction may be disallowed or recaptured. Also, there are annual limits to the Section 179 deduction (currently $1,160,000 for 2025), and phase-out thresholds begin when you purchase more than $2,890,000 in equipment. The pass-through aspect works because S-corporation income/losses flow to your personal return. However, you need to have sufficient basis in your S-corporation to take the losses, and passive activity rules can limit how much you can offset against non-passive income like W2 wages.

I started using taxr.ai for complex tax situations like this one last year and it's been a game-changer. I was considering a similar equipment leasing strategy, but I wasn't sure about the passive activity limitations. I uploaded my tax documents and business plan to https://taxr.ai and their AI analysis flagged several potential audit triggers I hadn't considered and suggested an alternative structure that would be more defensible with the IRS. Their system explained how material participation requirements work specifically for equipment leasing arrangements and identified documentation I'd need to maintain to support the deduction. It also helped me understand how the at-risk rules would apply in my specific situation.

I was really skeptical about taxr.ai at first, but I decided to try it for a similar Section 179 situation involving equipment leasing through my LLC. The analysis it provided was surprisingly detailed and pointed out some serious issues with how my CPA had structured my plan. The system identified that my initial setup would have failed the material participation test, putting me at high risk for audit. It also showed how I could restructure operations to meet one of the seven material participation tests and provided documentation templates for tracking my involvement. The best part was getting clear explanations of the basis limitations that would affect my ability to claim the full deduction. My CPA was initially defensive but after reviewing the analysis, he acknowledged the issues and we implemented the suggested changes. Ended up saving me from what would have been a disastrous audit situation!

If you're going to pursue this strategy, you should know that getting through to the IRS for guidance on complex Section 179 questions is nearly impossible these days. I spent WEEKS trying to get clarification on active participation requirements for a leasing arrangement like yours. After multiple failed attempts, I tried https://claimyr.com and was shocked when they got me through to an IRS agent in under an hour. You can see how it works here: https://youtu.be/_kiP6q8DX5c - it's basically a service that navigates the IRS phone system for you and calls when they reach an agent. Getting that direct guidance from the IRS about how they interpret material participation for equipment leasing arrangements made all the difference for my confidence in the strategy. The agent specifically addressed documentation requirements that weren't clear in any of the publications.

I'm eating my words about Claimyr. After my skeptical comment, I decided to try it myself since I had questions about Section 179 recapture rules that my CPA couldn't answer clearly. Got connected to an IRS agent within 40 minutes (after trying unsuccessfully for days on my own). The agent walked me through how recapture works if business use of equipment drops below 50% in subsequent years. She even emailed me specific forms and publication references. This clarification potentially saved me thousands in unexpected tax bills, as my original understanding of the recapture rules was completely wrong. My recommendation if you're doing this equipment leasing strategy - get clear guidance directly from the IRS about documentation requirements for material participation and business usage. Don't just rely on what the leasing company or even your CPA tells you.

Be very careful with these "tax strategies." My brother-in-law did something similar in 2023 with construction equipment. Yes, he got a big refund the first year. Then he got audited. The IRS determined he wasn't materially participating in the leasing business (it was basically run entirely by the management company) and disallowed the entire deduction as a passive activity loss. He ended up owing all the tax back plus penalties and interest. Make sure you're ACTUALLY involved in the business operations - keeping records, making decisions, etc. The management companies make this sound easy but the IRS knows exactly what to look for with these arrangements.

I've been in equipment leasing for 10+ years, and these "buy equipment with only 10% down, get huge tax deduction" schemes have exploded recently. Here's what these promoters aren't telling you: 1) The equipment is often significantly overpriced compared to market value 2) The "guaranteed" lease returns barely cover the financing costs 3) When the leases end, you're stuck with depreciated equipment 4) Many management companies take huge fees off the top The 179 deduction is legitimate, but the economics of these deals often don't make sense independent of the tax benefits. And if a deal only makes sense because of tax benefits, that's a huge red flag to the IRS.

As someone who's been through this exact scenario, I want to add a crucial point that hasn't been mentioned yet: the "at-risk" rules under Section 465. Even if you meet all the material participation requirements and structure everything correctly, you can only deduct losses up to the amount you have "at risk" in the activity. If you're financing 85% of the equipment cost, your at-risk amount is generally limited to your actual cash investment plus any recourse debt you're personally liable for. Non-recourse financing (where you're not personally liable beyond the equipment itself) doesn't count toward your at-risk basis. This means if you put down $150k on a $1M piece of equipment with non-recourse financing, your Section 179 deduction might be limited to $150k in the first year, not the full $1M. The remaining deduction would carry forward to future years as you pay down the debt or add more at-risk basis. Your tax advisor should be running the numbers on both the passive activity rules AND the at-risk limitations to give you a realistic projection of your actual first-year deduction. A $270k refund sounds aggressive unless you have substantial at-risk basis to support it.

This is exactly the kind of complex tax strategy that requires extreme caution and proper documentation. I've seen too many people get burned by these equipment leasing arrangements that promise huge immediate deductions. The key issues everyone has mentioned - material participation, passive activity rules, and at-risk limitations - are all legitimate concerns that the IRS scrutinizes heavily. But there's another angle to consider: economic substance doctrine. The IRS can challenge transactions that lack economic substance beyond tax benefits, even if they technically comply with specific code sections. Given the complexity and audit risk, I'd strongly recommend getting a second opinion from a CPA who specializes in these arrangements and has experience defending them in audits. Also consider getting representation insurance if you move forward - the audit defense costs alone can be substantial. The $270k refund projection sounds very optimistic given all the limitations that could apply. Make sure your advisor has modeled scenarios where the deduction is limited by passive activity rules, at-risk basis, or other factors. You don't want to be caught off guard if the actual benefit is significantly less than projected. Has your tax advisor provided you with a detailed analysis of how they calculated that $270k figure, including all the potential limitations?

I work as a tax examiner and have seen these equipment leasing arrangements come through audits frequently. The IRS has specific examination techniques for these cases, and they're very good at identifying the warning signs. A few red flags that typically trigger closer scrutiny: 1) Disproportionately large deductions relative to other business income, 2) Management companies that handle all aspects of the business, 3) Equipment purchases near year-end with minimal business purpose documentation, and 4) Promoters marketing these as "guaranteed" tax strategies. The material participation issue is huge - we look at contemporaneous records, not reconstructed logs created after the fact. You need detailed time records showing regular, continuous involvement in meaningful business activities. "Reviewing monthly reports" doesn't count as material participation. Also, be aware that even if you survive the initial audit, the IRS can examine subsequent years if equipment usage drops or if the business structure changes. I've seen cases where taxpayers met the requirements initially but failed to maintain proper business operations in later years, triggering recapture of the entire deduction plus penalties. My honest advice: if you can't afford to lose the entire investment independent of tax benefits, don't do it. These arrangements work sometimes, but the audit risk and potential penalties make them extremely high-stakes gambling with your financial future.

I appreciate everyone's detailed responses, especially the insider perspective from the tax examiner. This conversation has been incredibly eye-opening about the risks involved. After reading through all these comments, I'm seriously reconsidering this strategy. The combination of passive activity rules, at-risk limitations, material participation requirements, and potential audit scrutiny makes this feel much riskier than my tax advisor initially presented. A few specific concerns I now have: 1) The $270k refund projection seems unrealistic given the at-risk limitations if this is non-recourse financing 2) The management company handling everything would likely disqualify me from material participation 3) The audit risk and potential penalties could easily exceed any tax benefits 4) Even if successful initially, maintaining compliance for years could be challenging I think I'm going to step back and get a second opinion from a CPA who specializes in these arrangements and has audit defense experience. The potential downside of owing back taxes plus penalties and interest is just too significant compared to the uncertain benefits. Has anyone found legitimate equipment purchase strategies that work well with Section 179 but don't involve these high-risk management company arrangements? I'm still interested in tax planning, just looking for something with better risk/reward characteristics.