Framing it
Whether to buy or lease a service truck, a trailer, a mini excavator, or a $9,000 set of diagnostic equipment is a cash and tax decision, and the right answer depends on your margins, your borrowing capacity, and your tax position. That part belongs to you and your CPA.
What we can tell you is what each choice does inside your books, what records you will need, and which of the two ways of getting this wrong is expensive. Because both ways are common.
Where contractors lose money on this: not on the choice itself, but on recording it. A financed truck entered as a lump-sum expense, with the loan never set up as a liability, misstates the balance sheet and the profit and loss statement simultaneously and takes real work to unwind later.
The dividing line
The IRS de minimis safe harbor lets a business with a written capitalization policy elect to expense items costing up to $2,500 per invoice or item, rather than capitalizing and depreciating them. For businesses with an applicable financial statement, the figure is $5,000.
Two things about that sentence do the work:
This is why we flag every purchase over $2,500 for capitalization review rather than letting it flow through as an expense automatically. It is a two-minute check that keeps the fixed asset register honest and prevents a category of adjustment your CPA would otherwise find at year end.
Buying
Above the threshold, the item goes on the balance sheet as a fixed asset and is depreciated over its useful life. It does not hit the profit and loss statement in full on the day you buy it. This surprises people: you spent $18,000 and your profit barely moved.
This is the one that gets recorded wrong. There are three separate pieces and all three have to be present:
Coding the whole monthly payment to an expense account is the standard error. It overstates expenses, leaves a loan balance that never goes down, and produces a balance sheet that does not reflect what you own or owe. Fixing it later means rebuilding an amortization schedule from the loan documents.
A trade-in is a disposal of the old asset and an acquisition of the new one, not a discount. The old asset comes off the books at its remaining value and there is usually a gain or loss to record. Ignoring this leaves ghost assets on the balance sheet for years.
Leasing
A true operating lease — you use the equipment, you hand it back, there is no bargain purchase at the end — is simpler. Payments are an operating expense. Nothing goes on the fixed asset register.
A finance lease, sometimes labeled a lease-to-own, a capital lease, or a $1 buyout, is economically a purchase with financing attached. It generally belongs on the balance sheet as an asset and a liability, and treating it as a simple monthly expense misstates both statements.
You cannot tell which one you have from the marketing. You can tell from the contract. If the agreement contains a bargain purchase option, transfers ownership at the end, or runs for substantially the whole useful life of the equipment, it is very likely not a simple operating lease. Send us the agreement rather than the payment amount — the amount does not answer the question.
| Buy or finance | Operating lease | |
|---|---|---|
| Balance sheet | Asset and, if financed, liability | Nothing recorded |
| Profit and loss | Depreciation, plus interest if financed | Lease expense |
| Job costing | Allocate via an internal equipment rate | Allocate the monthly payment |
| Records needed | Invoice, loan agreement, amortization schedule, title | Lease agreement, payment schedule |
The part almost everyone skips
However you acquired it, an excavator sitting in overhead makes every job look more profitable than it is and makes overhead look bloated. The fix is an internal equipment rate: an hourly or daily charge that covers depreciation or lease cost, fuel, maintenance, and insurance, applied to the jobs that used the machine.
It does not have to be precise to be useful. A rate that is roughly right, applied consistently, tells you something true — whether the machine is earning its keep, and which jobs are actually carrying its cost. A rate that does not exist tells you nothing at all, which is the situation most trade contractors are in.
This matters most for trades with real iron on the books: general contractors, roofing companies running lifts and dump trailers, and plumbing contractors with jetters, cameras, and locating equipment.
Flow Bookkeeping Services is a bookkeeping firm, not a CPA firm, and nothing here is tax advice. Section 179, bonus depreciation, and the interaction between them change with legislation and with your specific tax position — those are questions for your tax preparer. Our job is to make sure the asset register, the loan schedules, and the job costing behind those decisions are correct.
Send us your QuickBooks Online file and we will tell you exactly what is wrong with it — free, in plain English, with no call required.
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