How to categorize equipment rental?
Equipment rental is an operating expense for using machinery or tools temporarily. It’s fully deductible and may be classified as a direct cost if used in production or service delivery.
What is equipment rental in accounting?
Equipment rental costs are operating expenses that cover payments made to use machinery, tools, or equipment owned by another party. These expenses are typically short-term and directly tied to specific business operations or projects. If the equipment is used for production, the cost may also be categorized as a direct expense under Cost of Goods Sold (COGS).
How to categorize equipment rental
- Record as an Operating Expense on your income statement.
- Use an “Equipment Rental” or “Rent and Lease Expenses” account in your chart of accounts.
- If equipment is used directly in production or service delivery, classify it under Cost of Goods Sold (COGS) as a Direct Expense.
- For general administrative or support equipment (e.g., office or IT rentals), record as an Indirect Expense under operating costs.
- For long-term or capital leases that transfer ownership or significant control, treat as capital assets and depreciate accordingly under ASC 842 or IFRS 16.
Examples of equipment rental expenses
- Construction machinery (cranes, excavators, forklifts).
- Audio-visual or lighting equipment for events or media production.
- Manufacturing or fabrication tools.
- Office or IT equipment rentals (printers, servers, laptops).
- Vehicle or truck rentals for business operations.
- Specialized tools or safety equipment for short-term projects.
- Temporary power generators or site infrastructure rentals.
Tax implications for equipment rental
- Equipment rental payments are fully tax-deductible as ordinary and necessary business expenses.
- Deduct rentals in the period they are incurred (accrual method) or paid (cash method).
- Rental payments that function as part of a lease-to-own or capital lease arrangement must be capitalized rather than expensed.
- For project-based work, allocate equipment rental costs directly to the project for accurate job costing.
- Keep rental agreements, payment records, and invoices for documentation and audit support.
