Trac Lease

[David]

Does anyone have a cite regarding trac leasing of a vehicle? The only thing I can find are private letter rulings, which can't be used as a cite or to support tax treatment of a trac lease.

My client, a S Corp single shareholder, is being told by colleagues that by doing a trac lease they are able to write off the complete cost of their SUVs if they use them at least 50% for business. I would think that if the IRS allows operating lease treatment for a vehicle that is being leased under a trac leasing arrangement, that only the business use % of the rental payments would be deductible and not the total rent payments.

Has anyone dealt with trac leasing and have cites to support the operating lease treatment for the lessee?

Thanks.

 

[Lynn EA USTCP in Louisiana]

I had to look this up, David as I had never heard of a TRAC lease.  Generally, it is more commonly used with over-the-road trucks which may be able to fully deduct the cost of the trac lease.  It would not be useful for an SUV since it retains the characteristics of a true lease with the pre-determined end-of-lease purchase price and the end-of-lease option to either purchase, walk away, or continue to lease.  Like you, IMO the deduction of the S corp is limited to the business use % less the lease inclusion cost.

[Lee B]

I hadn't heard of these so I spent some time online reading about them. This is a classic tax/GAAP grey area.

Apparently they are marketed by leasing companies to businesses with truck fleets.

Generally for GAAP purposes they are considered to financing leases.

If carefully structured they might be considered to be operating leases for tax purposes.

The leasing companies love them because if managed correctly it allows them to manage and smooth out reported earning.

On the lessee side as they say the devil is in the details. Hypothetically, if structured carefully, it could be an operating lease for the lessee.

However these leases are structured to benefit the leasing companies not the lessee, then promoted to the lessees.

For a more technical analysis go to this link   https://www.monitordaily.com/article-posts/lease-accounting-six-years-counting/

 

[Elrod]

David, Here is some other info I hope will help you.

http://www.leasing-101.com/2012.11Writ/TRACLeaseAnatomy.pdf

https://www.irs.gov/pub/irs-wd/1304005.pdf

https://www.irs.gov/pub/irs-wd/1337012.pdf

[David]

Thanks everyone for your help with this.

[Abby Normal]

On 10/26/2017 at 4:36 PM, Lynn EA USTCP in Louisiana said:

deduction of the S corp is limited to the business use %

A corporation always deducts 100% of vehicle costs and adds the value of personal use to the W2.

[Lynn EA USTCP in Louisiana]

too True, Abby Normal. What was I thinking ????? 

 

[Max W]

What makes TRAC leasing unique is the treatment of residual value.  At the end of the lease, if the equipment sells for more than the predetermined residual value, the lessee gets the difference.  If it sells for less, the lessee pays the difference.

Here is a very clear explanation of TRAC leasing and an example of how the residual is handled.

http://financewithafp.com/2010/01/what-is-a-trac-lease/

 

 

[Abby Normal]

On 10/30/2017 at 11:27 AM, Lynn EA USTCP in Louisiana said:

too True, Abby Normal. What was I thinking ????? 

 

This is our down time of year. I find my brain is far from peak tax season form quite often.