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Part of Ownership versus payment: what an equipment financing deal really turns on
Equipment financing: three rulebooks and who governs what
Equipment finance agreements answer to three rulebooks. What each one decides, who keeps each rulebook, and how to check the position for your own deal.
What to take away
- Three rulebooks answer different questions about one agreement: state commercial law, tax law, and accounting standards. They can classify the same contract differently.
- No single federal code governs equipment finance. Ownership, filing and licensing sit mostly with the states.
- California and New York both have commercial financing disclosure statutes, each with a threshold and a state regulator behind it.
- A governing-law clause can move commercial-law questions into another state's rulebook. Read it before you sign.
Three rulebooks, one machine
Ask whether your equipment agreement is a lease or a loan and you can get three honest answers that disagree. No reader is wrong.
Who governs what
Commercial code
- Who owns the asset
- State code
- Filing to protect a claim
- Secretary of State
- Deduction vs depreciation
- No
- Balance-sheet treatment
- No
- Default and repossession
- State code
Tax authority
- Who owns the asset
- Not tax
- Filing to protect a claim
- No
- Deduction vs depreciation
- IRS and state
- Balance-sheet treatment
- No
- Default and repossession
- No
Accounting standard-setter
- Who owns the asset
- Not accounting
- Filing to protect a claim
- No
- Deduction vs depreciation
- No
- Balance-sheet treatment
- FASB
- Default and repossession
- No
The commercial-law reader asks who owns the asset and what a creditor must file. That runs through each state's Uniform Commercial Code, filed in practice with the Secretary of State.
The question underneath is whether a lease is really a security interest. The label does not settle it. The test is at lease distinguished from security interest, and your state's version binds you.
The tax reader is the IRS federally, plus your state's revenue department. It decides whether you deduct rent or depreciate an asset you own.
Start with IRS Publication 946 for your tax year: the 2024 edition for a 2024 return filed in 2025.
The accounting reader is the Financial Accounting Standards Board. Since ASC 842 took effect, most leases longer than 12 months carry a right-of-use asset and a lease liability.
The ownership structure underneath these labels is the subject of equipment financing.
Who governs what
| The question | Who keeps the rule | Where to look first |
|---|---|---|
| Who owns the asset, and what filing protects a claim | The state's commercial code | The filing office, usually the Secretary of State |
| Whether the lender needs a license | The state financial regulator | The regulator's licensee search |
| What must be disclosed with an offer | The state legislature, where a disclosure statute exists | The regulator's site, then the statute |
| Deduction versus depreciation | The IRS and your state revenue department | IRS publications, then your accountant |
| Balance-sheet treatment | The accounting standard-setter | Your accountant |
| Default, repossession and resale | The state commercial code, and the contract | The agreement, then the code |
The middle column lists bodies, not rules. None states what it currently requires.
Example: one press brake, three readings
Take one agreement: 36 monthly payments of $2,400, an early option to buy at fair market value, and a machine with a ten-year working life.
One press brake, three readings
- The commercial-law reader sees a term far shorter than the machine's economic life and a buyout priced at market. That is a true lease, so the lessor owns it.
- The tax reader agrees that rent is deductible, provided the tests in the current edition of Publication 946 hold.
- The accounting reader sees a 36-month lease and books a right-of-use asset and a lease liability.
Change one term and the split widens. A dollar buyout, or a term stretched across the machine's life, switches the commercial-law reader to security interest, and the tax reader to depreciation.
Quoted badly, any of these readings misleads. The nine conversations in equipment financing mistakes share that trait.
The clause that picks the rulebook
Near the end of most agreements sits a governing-law clause. It may name a state that is not yours and not where the machine sits. If it does, the questions above may be answered by that state's code, and disputes may be heard there.
Read it before signing. If the named state is unfamiliar, ask a lawyer rather than assuming the worst. Check licensing and disclosure in two states, not one.
Tax and accounting treatment follow the bodies above, whatever the clause says. It does not cancel a licensing or disclosure duty where you operate.
How to check the current position in an afternoon
- Note three statesyours, the lender's, and the one named in the governing-law clause.
- On your state's filing office site, learn what a search against your business shows, how a termination is recorded, and when any filing was made.
- On the state financial regulator's site, check whether commercial lenders need a license and whether a disclosure statute exists. Closing a filing out at the end of a deal follows the equipment financing checklist.
- Read the IRS material for your tax year, then hand the agreement to your accountant.
- Ask the lender which body supervises it. A vague answer is worth a second question in writing.
Doing none of this is also a decision.
Where the rules change most often
Dated sources fail in three places. Verify each at the regulator, not in a summary.
Commercial financing disclosure. California's SB 1235, run by the Department of Financial Protection and Innovation, covers financing of $500,000 or less. New York's Commercial Finance Disclosure Law, administered by the Department of Financial Services, reaches $2.5 million. Virginia and Utah have their own.
Depreciation and expensing. Section 179 limits and bonus depreciation percentages are set by tax year. A structure chosen for one year can look different the next.
Lease accounting. ASC 842 reached public companies for fiscal years starting after 15 December 2018, and private companies after 15 December 2021.
Where to go for the rest
The contract governs more of the day-to-day than any statute does. Default notices and end-of-term options live in the document you sign.
Once you know which rulebook binds, the next question is which institution to approach. Sorting equipment financing lenders separates asset-first lenders from borrower-first ones.
For background on how small business finance works, the FDIC's Money Smart for Small Business is a free curriculum to work through before you sign.
Common questions
Is there a federal law that governs equipment finance?
Not as a single code. Federal bodies touch it at the edges: tax, bank supervision, unfair practice. Ownership, filing and licensing are mostly state matters.
My agreement says it is a lease. Is it?
For commercial-law purposes, that depends on the terms, not the title. For tax and accounting, each reader applies its own tests.
Do disclosure laws apply to my deal?
Only your state's current statute can answer that, and it may turn on the size and type of the transaction. Ask the state financial regulator, not a summary.
