To calculate the acquisition cost of equipment, add the net purchase price to every cost required to get the asset delivered, installed, and ready for its intended use. That total becomes the depreciable basis you record on your books and carry into your tax return. The IRS treats anything that adds long-term value to the equipment as part of its cost basis rather than a current-year expense, so the line between “capitalize” and “deduct now” is where most of the work happens.
What Goes Into the Purchase Price
Start with what you actually pay the seller. IRS Publication 946 defines this as the amount you pay in cash, debt obligations, other property, or services.1Internal Revenue Service. Publication 946, How To Depreciate Property That is the invoice price, but the invoice is rarely the whole story.
Sales tax charged on the purchase is folded into the basis rather than written off separately. A $100,000 machine can carry anywhere from zero to several thousand dollars in additional tax depending on where you buy it, and all of it capitalizes.
Discounts and rebates run the other way. If the seller offers a cash discount for early payment or a volume rebate, subtract it from the gross price before you begin adding other costs.
Trade-ins deserve special attention. Since the Tax Cuts and Jobs Act of 2017, like-kind exchanges under Section 1031 apply only to real property, not equipment.2Office of the Law Revision Counsel. 26 U.S.C. 1031 – Exchange of Real Property Held for Productive Use or Investment Trading in an old machine is now treated as a sale of the old asset and a purchase of the new one. You recognize any gain or loss on the old equipment, and the trade-in credit goes toward the purchase price of the replacement.3Internal Revenue Service. Tax Cuts and Jobs Act: A Comparison for Businesses
Getting the Equipment to Your Location
Every dollar spent moving the equipment from the seller to your site belongs in the acquisition cost. Publication 551 explicitly lists freight as an item included in the cost basis of purchased property.4Internal Revenue Service. Publication 551 (12/2025), Basis of Assets For heavy industrial machinery this can be a serious line item. Specialized carriers, oversize-load permits, and crane services at the delivery site all count.
International purchases add customs duties, import fees, and port handling charges. Publication 551 does not name these individually, but the general rule is that any cost required to acquire the property and bring it to its intended location gets capitalized. If you cannot take possession without paying the duty, that cost is part of your basis. Keep shipping manifests, customs declarations, and broker invoices; these are your proof in an audit.
Storage fees split by timing. If your facility is not ready and the equipment sits in a warehouse for two months while you pour a foundation, those storage charges capitalize because they arise before the asset is placed in service. Storage after the equipment is operational is an ordinary expense you deduct in the year you pay it.
Getting the Equipment Ready to Use
Publication 946 includes “installation and testing fees” in the costs that make up an asset’s basis.1Internal Revenue Service. Publication 946, How To Depreciate Property This category covers more than you might expect. Pouring a reinforced concrete pad, running dedicated electrical circuits, or modifying ductwork to accommodate a new machine are all site-preparation costs that add to the equipment’s value rather than being expensed as building repairs.
Professional assembly by the manufacturer’s technicians, calibration to meet operating specifications, and trial runs to confirm the machine performs correctly all belong in the same bucket. The test is straightforward. If the expense is necessary to bring the equipment to a state where it can do the job you bought it for, capitalize it.
Wages Paid to Your Own Employees
When your employees handle the installation instead of an outside contractor, their wages still get capitalized. Publication 551 states that if you use your employees, materials, and equipment to build or install an asset, those labor costs go into the asset’s basis rather than being deducted as current payroll expense.4Internal Revenue Service. Publication 551 (12/2025), Basis of Assets The same applies to depreciation on any company-owned equipment used during installation and to supplies consumed in the process. The uniform capitalization rules under Section 263A require you to add these costs to basis when they relate to producing or installing property.5Office of the Law Revision Counsel. 26 U.S. Code 263A – Capitalization and Inclusion in Inventory Costs of Certain Expenses The instinct is to treat employee wages as a regular operating cost, but that treatment is wrong when the wages relate to bringing a new asset online.
What You Leave Out
Some expenses arrive with the new equipment but do not belong in its cost. Capitalizing too much inflates the balance sheet and delays deductions. Capitalizing too little creates an underpayment problem if the IRS reclassifies the expense. A few common items sit on the “leave out” side of the line:
- Operator training. Teaching employees how to run the machine is a current-year expense because training relates to the people, not the asset. Specialized training given to the workers performing the installation itself is the exception; that ties directly to getting the equipment ready for service and can be capitalized.
- Maintenance contracts and warranties. Extended service agreements or prepaid maintenance plans purchased alongside the equipment are not part of the basis. The IRS treats maintenance as an ongoing operational expense.6Internal Revenue Service. 1.35.6 Property and Equipment Accounting
- Loan origination fees and financing costs. Fees paid to secure the loan that funds the purchase do not go into basis. They amortize as interest expense over the life of the loan.
- Post-installation moving or rearranging. If you relocate the equipment to a different spot in the facility after it is already in service, those moving costs are current expenses.
The One Interest Exception
Most businesses that finance equipment through a standard bank loan or equipment lease deduct interest as a business expense in the year they pay it. Section 263A carves out a narrow exception for property with a long production period. If you commission custom-built equipment and the production period exceeds two years, or exceeds one year and costs more than $1,000,000, interest incurred during that production period must be capitalized into the asset’s basis.5Office of the Law Revision Counsel. 26 U.S. Code 263A – Capitalization and Inclusion in Inventory Costs of Certain Expenses The same rule applies to property with a class life of 20 years or more. For a typical off-the-shelf purchase or short lead-time order, this rule will not apply.
Putting the Numbers Together
The final acquisition cost is a straightforward sum:
- Purchase price, net of discounts and rebates
- Plus sales tax
- Plus freight and shipping, including customs duties on imports
- Plus pre-service storage, if any
- Plus installation, assembly, and site preparation
- Plus testing and calibration
- Plus capitalized internal labor
That total is the depreciable basis you record on the balance sheet. It becomes the starting number for whichever cost-recovery method you choose, whether that is immediate expensing or depreciation over a recovery period.
A Shortcut for Smaller Items
Not every purchase has to go through this exercise. The IRS de minimis safe harbor lets you expense lower-cost items immediately instead of capitalizing them. If your business has an applicable financial statement, such as an audited statement, you can expense items costing up to $5,000 per invoice or per item. Without an applicable financial statement, the threshold drops to $2,500 per invoice or item.7Internal Revenue Service. Tangible Property Final Regulations – Frequently Asked Questions You elect the safe harbor annually on your tax return, and it applies per item, so ten $2,000 tools can all be expensed even though the total bill is $20,000.
Adjusting for Mixed Business and Personal Use
If the equipment is used partly for personal purposes, the acquisition cost you calculated stays the same on your books, but the depreciable basis on your tax return is reduced by the personal-use percentage. Special “listed property” rules apply to items such as passenger vehicles, aircraft, and property used for entertainment or recreation. When business use is 50% or less, the equipment does not qualify for Section 179 expensing or bonus depreciation, and you must use the slower straight-line method instead.8Internal Revenue Service. Instructions for Form 4562
The consequence gets sharper in later years. If you claimed accelerated deductions based on business use above 50% and that percentage later drops to 50% or below, you have to recapture the excess depreciation as income on your return. Be honest and conservative about business-use percentages when you first place the equipment in service. Overestimating to capture a bigger first-year deduction can reverse on you if usage patterns change.