Equipment Leasing Tax Deduction: The Seven-Day Rule the Opinion Letter Left Out

The opinion letter handled material participation and at-risk rules correctly, then stopped. It never addressed the requirement that determines whether the deduction works at all. The average rental period must be seven days or less. Rent on longer terms and the activity is passive by default, no matter how many hours the owner logs. This is the same standard behind the short-term rental tax loophole, and it governs equipment, aircraft, and yachts exactly as it governs real estate.

Rachael identified two live risks. Sam needed proof that end users were genuinely rotating third parties on short cycles rather than one lessee renewing continuously, and he needed hours data on the maintenance crew, because the 100-hour test also requires that no other person work more than he does. Burden of proof sits with the taxpayer, not the IRS.

Structure mattered too. Instead of a personal Schedule C, Rachael recommended an LLC owned by Sam’s S Corp, which keeps the activity out of the highest-audited filing category and keeps the eventual buyback inside an entity where compensation is already set. She also confirmed California conforms to neither bonus depreciation nor full Section 179 expensing, so the benefit here is federal only.