IRS Guidelines on Equipment Rental Tax Deduction

If you ever find the need to rent equipment, you may be eligible to deduct the cost if you follow some Internal Revenue Service, or IRS, guidelines. To claim a deduction for the equipment rental, the reason for the rental is important to determine whether a deduction is available. However, for most equipment you rent for personal purposes, the IRS will not allow you to claim the deduction.

When you rent equipment to construct or make permanent improvements to your home, there is a potential tax benefit you can claim for the rental fee; however, you cannot claim a deduction for it. Rather, the cost of the rental equipment will increase the tax basis of your home, which will reduce the amount of taxable gain you recognize when you sell it. For example, if you purchase a piece of land and construct your home on it, the equipment you rent that is necessary for the construction is a cost you include in the home’s tax basis. This can apply to a home you use as a personal residence, as well as rental and investment properties.

The IRS allows business owners to claim a deduction for any expense that is ordinary and necessary to operate their business. All this requires is that the expenses reasonably relate to the type of business you operate and that it be helpful. Therefore, if your business requires the rental of equipment, you can claim a deduction for the entire cost. For example, if you operate a landscaping business, renting lawnmowers during the summer is a deductible business expense. And if you operate a construction company, it is reasonable to rent tools and other types of equipment that builders generally use in their trade.

If you are renting the equipment for non-business reasons, such as to make home improvements or to construct a home, then you can increase the basis of the home when you complete the project. However, if you are a business owner, the year you claim the deduction depends on the accounting method you use. If you choose to report income and expenses using the cash method, then you can claim the expense in the year you pay for the equipment rental. However, if you use the accrual method, you can only take the deduction in the year you start using the equipment, which may or may not be the same year you pay the rental fee.

For instance, if you're going to be using a truck for your business in January 2019, and you sign and prepay for the rental in December 2018, you would deduct the expense on your 2018 return if you're using the cash method but would wait until your 2019 return if you're using the accrual method.

Business owners have options on how to report equipment rentals, which depends on the type of business entity you choose. If you are a sole proprietor, you report your equipment rentals, as well as all other business deductions on a Schedule C attachment to your tax return. But if you operate your business as a corporation, then report the rental deduction directly on the corporate tax return on Form 1120. And if you are a partner of a partnership, you will ultimately claim the deduction on a Schedule E attachment to your return with your other partnership income and deductions.