Tax Treatment of lease to own equipment

[Naveen Mohan from New York]

I have a client who bought a gas station last year. He paid $ 50,000. The purchase contract does not break things down. all it says is he is paying $ 50,000 and leasing all the equipment. At the end of the lease, he has the option to buy all the equipment for $ 1.00.

My question is this:

Is all $ 50,000 goodwill since he does not own any equipment. If not how do I allocate the purchase price between equipment and goodwill.

If it is goodwill, will it go under 15 year straight line amortization or do I have to use different amortization method?

Thanks for your help in this matter

Naveen Mohan

[Guest Taxed]

I have one client who is a Gas station/convenience store owner. I got to be honest with you, i have never seen a business deal so loosely constructed.

When you say he bought the Gas station. Did he buy the land and building, tools etc?

Is it 50,000 per year?

[Naveen Mohan from New York]

No. He just bought the business only. He paid $ 50,000 for business, walk in coolers, fixtures and cash register. He is paying $ 3,000 per month lease for 60 months and at the end of 60 months, he pays $ 1.00 and he owns all coolers, fixtures and cash register. That's all contract says.

[kcjenkins]

OK, based on that he paid $50K for Goodwill plus a "financing lease" or "lease purchase" for the equipment.

[Mr. Pencil]

Is all $ 50,000 goodwill

None of it is allocable to goodwill if he didn't file Form 8594. He has to follow the rules to get the tax break! It is a purchase regardless of the wording on the contract. Allocate the total price to the basis of individual pieces of equipment in the same ratio as their fair market values. Use short year accounting unless he started on January 1 or has a fiscal year. Keep a copy of the memo you send him, recommending he have an attorney review the purchase transaction.

[DANRVAN]

As Mr. Pencil stated, he needs to see an attorney. Since he probably does not have one (or at least a good one) you should recommend one to him. You are more likely to be kept in the loop. Outline your concerns for him to discuss with the attornery.

[BulldogTom]

Sounds like a 50K goodwill payment (name, customers, location, etc) and a capital lease for the equipment for $180K (60 payments of $3000). Some portion of that 180K should be interest. The rest should be the cost of the assets. Your client needs to have an equipment list and assign the cost of the lease to those items after deducting the interest.

Just my 2 cents.

Tom

Hollister, CA