Lease payments vs capital asset

[cpabsd]

Taxpayer is paying for a lease through Quality Leasing for 3 different pieces of construction equipment.  They independently called the leasing company and were told that the lease was fully tax deductible.  I'm not so certain that is the case.  They can purchase each piece of equipment for $1 at end of lease.  I believe I need to capitalize and depreciate.  Thoughts???

 

Here is what Publication 535 says regarding this:

 

Conditional sales contract.   Whether an agreement is a conditional sales contract depends on the intent of the parties. Determine intent based on the provisions of the agreement and the facts and circumstances that exist when you make the agreement. No single test, or special combination of tests, always applies. However, in general, an agreement may be considered a conditional sales contract rather than a lease if any of the following is true.

• The agreement applies part of each payment toward an equity interest you will receive.

• You get title to the property after you make a stated amount of required payments.

• The amount you must pay to use the property for a short time is a large part of the amount you would pay to get title to the property.

• You pay much more than the current fair rental value of the property.

• You have an option to buy the property at a nominal price compared to the value of the property when you may exercise the option. Determine this value when you make the agreement.

• You have an option to buy the property at a nominal price compared to the total amount you have to pay under the agreement.

• The agreement designates part of the payments as interest, or that part is easy to recognize as interest.

 

[BulldogTom]

You should treat this as a purchase and capitalize and depreciate.  As well, I would create an amortization schedule for all the payments, busting out the interest from the purchase price of the equipment.  The contractor should know what the purchase price is of the equipment and it should be easy to take the "rent" payments and get to the principal and interest on the amort schedule.  The interest should be currently deductible and the rest depreciated.

 

I have done many of these in my position in the construction industry.

 

Tom

Newark, CA

[kcjenkins]

Tom is exactly right.  This is a 'capital lease', often called a lease-purchase.  

[Randall]

Sales people are always making comments like this regarding tax treatment (fully deductible or whatever).  Tom is right.

[Gail in Virginia]

The lease is fully deductible.  Just not necessarily in the current year. I am so glad that our customers have so many people to advise them on the proper tax treatment of everything, and all they need us for is to fill in the numbers and get them their refund.

[cpabsd]

Thanks everyone.  I knew it was a capital lease, but the client was pretty insistent.  Always nice to have confirmation that I was correct.